PlayStation Sees Record Sales Alongside Profit Declines & Lower Forecasts in Sony’s FY 2023 Q3 Report

It’s already my third major recap of this latest earnings season! Time flies when we’re having fun. And earnings season is the most fun.

Now it’s Sony’s turn. The Japanese consumer tech maker reported fiscal 2023 third quarter results recently and PlayStation set yet another revenue record.

Of course, that’s not the whole story. It’s time to go beyond the “all-time high” headlines to talk about why it’s a really intriguing report and time for Sony’s gaming division, including how profitability is taking a hit even as sales soar, its supplemental material shared some updated stats and executives have again adjusted future expectations.

It’s true Sony’s Gaming & Network Services (G&NS) recorded a best-ever quarterly revenue in the period ending December 2023. Around $10 billion! As it has done a lot recently, driven not just by organic growth due to add-on content and digital downloads, but also continued impact of a weakening yen that works in favor of companies that mainly operate globally.

On the flip side, quarterly operating profit moved down over 25% during the holiday period and is trending towards the worst annual profit of the PlayStation 5 era. There’s both macro and micro reasons for this, including interest rates and high costs alongside weaker internal output and worse hardware losses.

During October to December, Sony shipped 8.7 million PlayStation 5 consoles. While that’s the best single quarter for the console, well above last holiday’s 7.1 million, it’s a million fewer than PlayStation 4 did at the same time and missed estimates enough for them to substantially reduce annual guidance. It’s hard to believe PlayStation 5 is entering the middle phase of its life cycle now trailing its predecessor by a wider margin than even last quarter.

The major story on the software side continues to be Marvel’s Spider-Man 2, which swung above 10 million units sold-through to buyers this month after reaching the 5 million milestone back in October. It carried first-party, and also helped drive Monthly Active Users (MAUs) growth even as PlayStation Plus memberships fell.

These led to management again revising its forecast, this time downward for both revenue and hardware. They even provided a look ahead to next fiscal year, clearly signalling PlayStation 5 annual sales are peaking and will shrink in the back half of its life. As far as games and its tent-pole studios, there are no plans for “major franchise” first-party launches until at least April 2025.

Addressing concerns of profit margins during the company’s conference call, Sony’s President Hiroki Totoki cited at least two reasons: difficulty in cutting prices for hardware and needing to create better opportunities for first-party software on more platforms, including PC.

“How can we, given the situation, put our product lines together to make it affordable, without relying on steep discounts, to reasonably sell them to continue our commercial journey on a sustainable basis?” Totoki said. “I personally think that’s important, and there is an opportunity in that.”

Now into the full rundown of numbers and my current predictions. Buckle up!

Sony’s total revenue moved up 22% in the quarter, to a record amount of $26.19 billion. Operating profit reached $3.24 billion, up 10% and the second highest in its history. Growth here came mainly from Entertainment, Technology & Services (ET&S), Financial Services and G&NS.

Zooming into the gaming division, sales rose 16% to a record $10.1 billion driven by third-party software, downloadable content and exchange rate movement. To illustrate the last point, the impact from yen fluctuation alone was $531 million. This implies “true” dollar sales growth around 10%.

Operating income declined 26% to $602 million because of worsening hardware losses and lower internally-published game sales. Across this most recent three-month period, the PlayStation business represented nearly 40% of Sony’s sales yet under 20% of its profit.

Most product categories within G&NS saw higher quarterly sales, including Hardware up 8% to $3.3 billion or 33% of the total. Add-On Content rose 33% to $2.44 billion, accounting for a 24% slice. Digital Software jumped up 16% to almost $2 billion, at 20% of the total. Physical Software and Other Software both declined, 7% and 30% respectively.

Expanding to the latest annualized numbers gives us a broader sense of where the business is at right now. For revenue, it’s the best it’s ever been at $29.65 billion. Compare that to last year’s $22.62 billion. On the other hand, PlayStation currently has the lowest trailing 12-month profit since Fiscal 2017. It’s at $1.56 billion, compared to well over $2 billion a year back. The size of this deterioration is truly evident when you view the the second chart in the above gallery.

Seeing as the “Big Three” have now all reported this season, it’s a good time to revisit our industry comparison. Using annual numbers, Sony’s massive $29.65 billion is tops across all players, above even Tencent’s $26 billion with the caveat that the Chinese internet conglomerate doesn’t report until next month. Microsoft’s $18.13 billion now includes Activision Blizzard, and Nintendo currently stacks up to roughly $13 billion.

Again I’ll mention that while Sony’s sales are soaring, PlayStation is not nearly as profitable as the likes of Nintendo which has more than twice as much operating profit (over $4 billion) on less than half the sales. And it’s not like this is a recent phenomenon. Even during Switch’s fourth fiscal year, a similar time period, Nintendo’s margins were better.

Want more stats? Well, either way, you’ll get them.

Taking the latest PlayStation 5 hardware shipments into account, its lifetime figure is now at 54.8 million. As you’ll see in the above launch-aligned chart, its predecessor was at 57.3 million at this time in the cycle. Not only that, the gap between the two is widening at the exact time when PlayStation 5 is hitting a plateau.

As for comparisons outside of Sony, the PlayStation 5 is steadily approaching the 58 million lifetime sales territory of Microsoft’s Xbox One and will likely surpass it by this fiscal year’s end in March. Next up will be Nintendo Entertainment System (NES) at almost 62 million, still a fair ways off.

Out of those 54.8 million shipped to market, Sony announced back in December that PlayStation 5 reached 50 million sold-through to consumers.

Unit sales for PlayStation software moved up slightly from 86.5 million this time last year to 89.7 million, an increase of 4%. The skew was much more towards those published externally, given that only 16.2 million or 18% were first-party games this time versus 24%, at 20.8 million, during last year’s fiscal Q3.

Most of first-party’s movement was due to Insomniac’s Marvel’s Spider-Man series, which has now surpassed a healthy 50 million units sold-through in aggregate, inclusive of sales from PC since the first entry back in 2018.

Engagement across PlayStation Network hit an impressive 123 million MAUs in the quarter ending December, an all-time high up from last year’s 112 million. The influx of active users, driven not just by Sony’s titles but also external free-to-play offerings like Fortnite, led to 13% more hours played across the ecosystem.

While the company hasn’t shared PlayStation Plus membership figures since the end of last fiscal year, management’s prepared remarks did point out that subscriptions declined since last year though service revenue did increase.

“Regarding network services, despite the impact of a slight year-on-year decrease in the number of PlayStation Plus subscribers, revenue increased 11% year-on-year,” the remarks said. “Mainly due to the impacts of a further shift to premium services and price revisions.”

Essentially, dollar sales from PlayStation Plus are going up for now because of users going to the premium tiers and the price increases the company has instituted. From my perspective, I would add that’s not necessarily sustainable and I see this as more of a temporary dynamic. It’s known that gaming subscription services are stagnating, and this is one such example.

Another area lacking in the report was any shipment figures for Sony’s latest product launch in PlayStation Portal, which hit market during November 2023. Anecdotally, it seems like supply was highly controlled. While we don’t know specifics, we can infer from category results. The segment called Others, which covers peripherals and PlayStation VR2, jumped up 60% to $698 million in Q3. While still a small slice at 7% of sales, that’s a sizeable bump I’d wager was caused directly by Portal.

When taking the full Q3 report into consideration, it shows PlayStation’s position as one of strength on the sales side, partially due to the yen, and an ongoing struggle for profit growth amidst ballooning development and hardware costs. Yes, there’s general inflation and interest rate impact. It’s also the case that rapid-paced triple-A game development and maintaining hardware pricing as a console ages is not sustainable.

The good news is that software demand and player engagement look healthy. It’s just harder to translate these things into higher margins, especially since attracting players to something like PlayStation Plus requires spending money on partnerships or launching first-party games simultaneously into the service, which Sony is not currently doing. At least management is expanding to platforms beyond console, thus spreading risk and boosting audience reach.

Before closing the books on another quarter, I’ll now looking ahead to the finale of Sony’s fiscal year ending March 2024 and beyond.

In a classic flip flop, after revising annual PlayStation revenue guidance up by 5% last quarter, it now backed that off and reduced it by that same amount. This still translates to an increase of 14% up to $29 billion, which would certainly be a record high and lead the industry. I believe this will happen.

Even with the double-digit decline for operating profit this quarter, management reiterated the annual profit guidance of $1.89 billion or up 7%. In order to get there, management said they are reviewing measures to improve profit. One of those could very well be more layoffs. This time, I’m skeptical and I don’t think it’s going to meet this target.

The holiday period was going to be a huge indicator all along for PlayStation 5 unit figures. Now that it missed, management revised annual guidance down from what I called an unrealistic goal of 25 million to now 21 million. This would still be a million above the PlayStation 4’s best year, and I don’t buy it. It’s at 16.4 million so far, leaving 4.6 million to ship between January and March to get there.

Back when Sony was signalling higher, my forecast was also higher. Now I’m at 19.5 million to 20 million, tops, if it can even replicate its predecessor’s success. the only way to get there is if Sony announces aggressive discounting as soon as possible, which again puts a strain on margins.

Finally, executives acknowledged that this will likely be the best year of PlayStation 5 sales, and it’s all downhill from here!

I know what you’re saying: What? Already?! Well, PlayStation 4 peaked in its fourth fiscal year, and PlayStation 5 will be entering its fifth financial year starting this April.

Software is where uncertainty continues, notably for internal studios. There’s no doubt Marvel’s Spider-Man 2 accomplished an incredible feat. That’s the outlier. Plus, the likes of Marvel’s Wolverine, a Ghost of Tsushima sequel and anything from Naughty Dog are at least a year away, if not multiple years.

While The Last of Us Part II Remastered launched on PC and Helldivers 2 is off to a fantastic start, partly because of Steam, Sony didn’t capitalize on the Palworld craze and has a sparse console calendar incoming. I do expect a live service title or two by March 2025, like Concord and Fairgame$, alongside select PC launches to hold software sales over until seeing heavy hitters again.

Development and marketing are as expensive as ever, and projects require increasingly longer timelines to complete. A steady cadence of blockbuster releases is tough if near impossible. That’s a huge part of why we see the current dynamics underlying Sony’s gaming business, and the team will have to navigate these treacherous waters.

As always, I very much appreciate you stopping by for my ongoing earnings coverage. Check in on social media for more and visit soon for future articles. Be well!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥143.1

Sources: Company Investor Relations Websites, Sony Interactive Entertainment.

-Dom

Nintendo Nears 140 Million Switch Units Sold & Raises Annual Outlook Again in Steady Fiscal 2024 Q3 Report

Next up for this quarters’ recap series, as you clearly know from bookmarking my earnings calendar, is Nintendo. The gaming company that continues to delight audiences and defy expectations.

The Japanese console manufacturer and mega publisher reported figures for the nine months ending December 2023, the third quarter of its fiscal year ending March 2024. Which means I have plenty to break down including quarterly, nine month and trailing annual numbers. A little bit of everything!

Nintendo’s quarterly financial results were down slightly in Q3, however its 9-month figure remains trending upwards during this likely final full year of the Switch’s life cycle.

Super Mario Bros. Wonder was the big winner of the quarter, moving nearly 12 million units as the fastest-selling Super Mario title in series history. Over the April to December span, The Super Mario Bros. Movie and The Legend of Zelda: Tears of the Kingdom were doing heavy lifting along with additional content for its suite of legacy titles like Mario Kart 8 Deluxe and Splatoon 3.

Nintendo shipped upwards of 6.9 million Switch units during the December quarter, and without official discounting at market. While down a bit since last year, that’s a healthy result for a console that saw its first holiday season back in 2017. This pushed lifetime shipments to nearly 140 million, steadily approaching the realm of all time behemoths like Nintendo DS and PlayStation 2.

“When we look at the sales situation so far this fiscal year against this backdrop, we believe that hardware sales have held stable since the first half and that the holiday season results were steady,” Nintendo President Shuntaro Furukawa said in a Q&A.

“We want to maintain momentum in the business through a good balance of both first-time buyers and demand for multiple units. During the holiday season, we noted a particular rise in first-time buyers of our hardware, and we see this as a positive sign for the Nintendo Switch business going forward.”

All of this led management to raise full year guidance yet again, similar to last quarter, for a number of things: sales, profit, hardware and software, in addition to a dividend hike that will return more profits to shareholders. I’ll cover these in more detail in a later section.

Now to the question on everyone’s mind: Where’s that Switch Pro? (Oh no, not again.)

Really, check below as I’ll fully cover the company’s report then drop a set of predictions, including my latest forecast on when the Switch’s successor will be out. Let’s jump into it!

I’ll now dig into the above slides and below charts, which cover all of the numbers Nintendo released during its third quarter 2024 announcement.

Overall, the firm generated $4.18 billion in profit during the three months ending December 2023. That equates to a 6% decline. Operating profit dipped 3% to $1.29 billion.

Across the latest three quarters, net sales grew 8% to $9.74 billion while operating profit rose an impressive 13% to $3.24 billion.

These can be attributed to the yen’s continued weakness overseas, a higher proportion of Switch OLED model shipments compared to the broader family of devices plus add-on content for its more evergreen titles. Not to mention having one of 2023’s biggest movies based on a world-renowned brand, I might add.

Expanding to latest annualized figure, which ends up being the 2023 calendar year number, revenue moved up 7% to $12.53 billion. That’s the best calendar year revenue number for Nintendo since 2008! Operating income bumped up even more, settling at $4.09 billion or an increase of 10%.

These growth numbers are all fantastic for a company that will likely move into its next generation of consoles within the next six to twelve months, and highlights the smart move by executives to diversify into different areas like digital support, intellectual property (IP) adaptation, online services and post-launch content drops.

Moving onto product categories, Nintendo’s hardware and software each contributed exactly 50% during the third quarter. This split last year was 51% and 49%, in favor of hardware. Across the 9-month period, the software slice was larger at 55% of the total. At the same time last year, it was 54%. Not too much movement in either direction over the last couple years.

With respect to regional splits, the latest nine months continued a slight shift away from Japan and towards The United States and its neighbors. The Americas made up 44% of sales, up from 43%. Europe remained flat around 25%, while Japan declined from 24% to 21%.

The digital portion of Nintendo’s sales during Q1 to Q3 moved up a couple percentage points to 48%, fitting the industry trend towards downloads as opposed to retail buying. Digital came in around a quarter of the company’s revenue stream, growing 12% in the last nine months to $2.42 billion.

Here’s where Nintendo stacks up against the industry’s biggest players. First, yen weakness does have a positive impact on revenue in local currency for companies that mainly operate globally, like a Nintendo or Sony. However when converting from yen to U.S. dollar, it doesn’t appear as attractive because of the low rate. Sony, which reports gain next week, had PlayStation at $28 billion annually while Tencent stacked up to $26 billion. Microsoft’s integration of Activision Blizzard brought it to $18.13 billion this quarter, while Nintendo comes in under $13 billion. However, Nintendo’s operating margins are best in industry, even while developing a new hardware.

Focusing strictly on Switch hardware shipments, these totaled 6.9 million during October to December. Compare that to 8.23 million the prior year.

Which is excellent for a console that’s saturated its market as much as Switch has. For context, I estimated that Microsoft shipped 4 million max Xbox Series X|S this holiday. Sony moved 7.1 million PlayStation 5’s in the quarter ending December 2023.

That brought hardware units to 13.74 million during the first nine months of this fiscal year, down 8% from 14.91 million. Management noted this was mostly in-line with expectations for the time frame.

As has been the case for a couple years, the predominant model during this period was the Switch OLED. That version shipped 8.17 million between April and December, up 6% from 7.69 million. Next up was the base model at 3.4 million, down 25% from the prior year’s 5.22 million. Rounding out the list was Lite, which grew 9% year-on-year from 2 million to 2.18 million.

So, this all brings Switch lifetime sales to 139.36 million. Is there a legit chance it clears the Nintendo DS at 154.02 million to become the company’s best-selling device ever? The answer is: absolutely.

Switch is under 15 million away from Nintendo DS. If the company’s target holds this fiscal year, it would need 13 million more during the financial period beginning in April. I am betting that, by the end of March 2025, not only will Switch be Nintendo’s best-selling ever, it will surpass PlayStation 2 at 155 million to secure the top spot on the all-time top seller list. Even if Super Switch exists!

Back to the latest announcement, Nintendo did share some insight into hardware sell-through to consumers. Namely that it’s been steady for the console’s age, and that the OLED version saw increased demand, echoing the growth seen in shipments. And it wasn’t just first timers, there were plenty of people who double dipped or grabbed replacements, according to prepared remarks.

Now swapping over to Nintendo’s other bread-and-butter which is software sales, this is where the team has shined the entire back half of this generation with both new games and existing support.

For the holiday quarter, software unit shipments for Switch totaled 66.87 million. That’s down only 14%. Expanding to the April to December period, unit sales for software dipped 5% to 163.95 million. Considering the saturation and how many titles it’s already moved, that year-to-date figure showed great resilience.

The proportion of first party titles, those published by Nintendo, rose from 79% to 83% in the nine months ending December. That’s more than four out of every five games purchased in this period, namely due to flagship Zelda and Mario launches plus a mainline Pikmin.

How’s about yet another lifetime milestone for the Switch’s historic run? Just this quarter, lifetime unit sales on the platform surpassed 1.2 billion. The strength of its portfolio is unrivaled even compared to prior Nintendo generations, plus there’s the legacy library via Switch Online, broad attraction of franchises like Animal Crossing and third party offerings like Fortnite.

Speaking of big sellers, Switch now has 24 “million-seller” titles which shipped a million units or more in the latest nine months alone. Within that, 17 were first party and 7 were external publishers. Compare this to last year’s 27 overall, and it’s another example of the platform’s appeal.

The elephant in the room was Super Mario Bros. Wonder, not just shipping 11.96 million but also selling-through 10.7 million of those to consumers. For comparison to recent franchise titles in their respective first quarters: Super Mario Odyssey had 9.07 million in 2017, New Super Mario Bros. U Deluxe reached 2.5 million in 2019 and 2021’s Super Mario 3D World + Bower’s Fury saw 5.59 million. Keep in mind the lower install bases at this times, of course.

Elsewhere, new launch in Super Mario RPG Remake shipped 3.14 million since hitting market in November, another benefactor of the Switch effect. July’s Pikmin 4 also hit the 3 million milestone, moving up 720K units to 3.33 million.

After an incredible run since May, The Legend of Zelda: Tears of the Kingdom reached the 20 million milestone this quarter, settling at 20.28 million. While it’s slowed in recent months, it’s still a ridiculous feat to hit this sort of threshold in less than a year.

One one that seems to never slow down is Mario Kart 8 Deluxe, which zoomed past the frankly absurd 60 million milestone this quarter. After somehow shipping 3.57 million in the holiday quarter, it’s held pace at 60.58 million. That’s well above the second place on the platform in Animal Crossing: New Horizons at 44.79 million. I don’t know how Nintendo can top this latest Mario Kart entry, and I don’t envy the designers that have to make its follow-up.

The last statistic revolved around engagement, as Nintendo announced a record 122 million Annual Playing Users as of December, up from 114 million last year. While this isn’t as indicative of active players as something like monthly or daily active users, it does show that buyers at least login to their devices over the years. Separately, Nintendo didn’t share any updates on Switch Online subscribers, last reported at 38 million in September 2023.

Between a nice holiday quarter, the financial growth in the first nine months of fiscal 2024, the fastest-selling Super Mario ever, major milestones for its biggest franchises, diversifying into film and other media plus revitalizing classics to close the cycle, Nintendo’s latest run continued in this earnings report as Switch approaches its seventh birthday next month.

To say it’s exceeded all expectations, and continues to prove analysts wrong, is an understatement.

Before closing out, let’s look at that updated guidance and make a few predictions. Management revised a number of forecasts upward, including financial targets and unit sales expectations.

The firm now expects 3% more net sales and 2% better operating profit during the fiscal year ending March 2024. That translates to roughly $11.4 billion and $3.56 billion, respectively. This indicates Nintendo expects both of these to grow in the single digits, and I expect them to be achieved. If not exceeded by a decent margin.

On hardware, according to Furukawa commenting after the company’s announcement, the Switch will remain its “main business” through the end of March and into the new fiscal year. In fact, he called out internet rumors and asked people to “exercise good judgment” when hearing them.

Fitting with this sentiment, the company raised Switch unit guidance by 500K to 15.5 million. That implies the January to March quarter to have only 1.76 million shipped in order to reach this goal. Personally, I’ve been predicting the 16 million to 16.5 million range for this year. I see no reason to change that now, and I’m even leaning towards the upper end of this range.

The real question on everyone’s mind is the Super Switch! Mainly when, and how much. Executives are playing coy for now, as expected.

“We are unable to make any comments beyond saying that our company is constantly conducting research and development on new hardware and software,” Furukawa said.

There were some small hints in his latest Q&A series posted today. Furukawa pointed out the hybrid model is the “optimal way” to deliver Nintendo’s unique experiences. That all but confirms the successor will have both handheld and console functionality, consistent with recent speculation that’s pointed to a larger screen in portable mode.

I’ve written before that my forecast puts Super Switch in the fourth quarter this calendar year. I’ll also stick to this, expecting an initial announcement after Nintendo’s current financial year ends, so as to not jeopardize hitting that hardware target. This puts a reveal in April or May, then more details and presentations leading into launch around October.

Management also bumped up its software expectations by 3% for the full year, now guiding that Switch will have 190 million units shipped in that period alone. This feels on the money, with slight upside to beat it.

The current slate features one brand new title Prince Peach: Showtime!, a more niche title launching in March that I think will do alright yet not gangbusters. There’s also the remake of Mario vs Donkey Kong out next week. Between these and continued interest in Super Mario Bros. Wonder among others, I’m not worried about Nintendo reaching its more optimistic guidance.

Beyond that, it’s anyone’s guess because Nintendo hasn’t shared much for its offerings beyond a pair of revitalized old games in Luigi’s Mansion 2 HD, on the calendar for Summer 2024, and the pending Paper Mario: The Thousand-Year Door remake sometime this year. Metroid Prime 4 remains a mystery, the only title in its financial report listed as to be announced.

One title that probably won’t hit Switch anytime soon is Palworld, what with The Pokémon Company’s investigation into 2024’s biggest sales surprise so far for potential IP breach and asset usage. While I’m not sure that a legal battle will ensue, I’m sure it will remain on other platforms for the foreseeable future.

That does it for my latest earnings recap. I’ll be back soon with more coverage of the season and other topics as 2024 keeps it moving. Be well, all!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥143.22.

Sources: Company Investor Relations Websites, Video Games Chronicle.

-Dom

Microsoft Posts Record Xbox Revenue in Fiscal 2024 Q2 Mostly Due to Acquiring Activision Blizzard

As you well know because you’ve seen my handy earnings calendar for this season, Microsoft reported its 2024 second quarter results earlier this week.

Only executives and literally everyone, including when I wrote about this very topic last quarter and predicted the revenue amount, expected the software tech conglomerate to post record gaming sales almost entirely becasue Activision Blizzard numbers are now included since closing the deal in mid-October 2023.

That’s precisely what happened.

Still, as I’ll illustrate shortly, I’d argue massive growth isn’t the whole story. I’m more interested in isolating Xbox’s organic performance, comparing post-acquisition to the sum of both entities before it happened and trying to determine how annual numbers will shake out. In addition, I’ll review the acquisition’s notable hit to profitability for the time being due to its cost and integration.

Essentially: headlines, even mine, never tell the whole story!

There’s also a divide happening right now with Microsoft. Just as the company closed above $3 trillion in market value for the first time, it announced big layoffs in its gaming division. Around 1,900 people across Xbox, Activision Blizzard and Bethesda, or 8% of the gaming workforce, were let go. I know there’s various factors behind this, including macro ones like inflation and interest rates. Plus, stock market valuations are determined by a collective set of investors rather than a company’s management.

Still, the optics and timing are tricky. The fact that job loss after the deal due to redundant roles and function overlap was inevitable doesn’t make it any less painful for the people involved. Especially as the broader company reaches record valuations and reports gaudy numbers.

Moving into those numbers, Xbox revenue totaled over $7 billion in the quarter ending December 2023. That’s up 49%. Within that, Activision Blizzard was responsible for contributing $2 billion. This makes Gaming the third biggest contributor to all of Microsoft’s sales at 11% of the total compared to 9% last year, right now behind only Server and Office.

It’s pretty clear what’s underlying this: Buying a massive third party publisher and integrating it within content and services figures. Even so, there was some organic Xbox growth in Q2. Under 6% to be semi-exact. I was also impressed that hardware was able to deliver solid performance during the holiday season, even if boosted by discounting.

“With our acquisition, we’ve added hundreds of millions of gamers to our ecosystem, as we execute on our ambition to reach more gamers on more platforms,” said Chief Executive Officer (CEO) Satya Nadella. “Great content is key to our growth, and across our portfolio, I’ve never been more excited about our lineup of upcoming games.”

Pretty standard corporate speak from Nadella, and I’d argue Xbox’s line-up this entire generation has been anything but exciting. In fact, management quotes around gaming on the earnings call were generally tame. The team did offer select insights that I’ll cover later, namely on cloud streaming and engagement across platforms including mobile, the latter of which hit record highs after the integration of Activision Blizzard players.

Read on to learn what the numbers truly look like, some estimates from me around a combined historical comparison, my guesses for hardware unit sales and then predictions going forward into 2024.

First thing to note when checking the above slides is Xbox, Bethesda and now Activision Blizzard are all accounted for within Microsoft’s broader More Personal Computing (MPC) segment.

Quarterly gaming revenue rose 49% in the three months ending December, up to an all-time high of $7.11 billion. This was exactly within the firm’s guidance.

What drove it? Well I’ll break that into two categories: Activision Blizzard and pre-acquisition Xbox. Here is where we talk the deal’s impact, which actually cost upwards of $75 billion based on the latest filing. During the second quarter, it contributed $2.1 billion to gaming division sales.

Essentially, Activision Blizzard was responsible for 30% of Microsoft’s second quarter gaming business at the top-line. Still, as I’ll get to in a second, its inclusion put major downward pressure on profit.

Separating that out, the $5 billion “organic” Xbox sales implied a growth rate of 5.7%. Much less than the headline suggests, right. Still, it’s certainly noteworthy for the important holiday time frame, notably while facing what executives called a “tough console market.”

Moving to the latest year, which happens to cover the 2023 calendar months, gaming revenue expanded 17% to rise above $18 billion for the first time ever. This particular figure, mapped out over time in one of the below charts, will only grow over time as more quarters take the acquisition into account.

I’ve also provided a new chart measuring Estimated Combined Gaming Revenue that, full disclosure, pulls in a few different assumptions to form a rough estimate of how annual figures compare when adding in Activision Blizzard’s historical revenue. I’ve summed up the two pre-deal entities going back for a few fiscal years then subtracted $2 billion per year in assumed overlapped sales.

What results is where I think Microsoft gaming sales could be when a year of Activision is considered: almost $22 billion, up a bit from the $21.6 billion a year back. That’s an upward trajectory of 1% as opposed to the 17% I just referenced. Good, yet nowhere near as wild as the headlines indicate.

While Microsoft is the first of the bigger gaming companies to report, I like to gather up a comparison to peers and update throughout the season in my articles. Sony’s latest annual PlayStations sales tracked towards a whopping $28 billion, with notable impact from the yen’s depreciation. Tencent was around $26 billion. This is where the current combined Xbox and Activision Blizzard slots, at $18.13 billion. Nintendo’s latest hit $13 billion. My usual caveat is that Nintendo is operating at higher profitability than at least PlayStation, and likely Xbox as well.

Speaking of profit, Microsoft gave us a bit more than usual this quarter! Partially because it had to illustrate the impact from Activision Blizzard, but I’ll take it. For the MPC group, operating profit jumped up 29% to $4.29 billion. Half of the “gross margin dollars” profit metric, a figure that moved up 34% in Q2, was contributed by Activision Blizzard as it helped up operating expenses at a higher rate of 38%. Focusing strictly on Activision Blizzard, its net impact was $437 million in operating income because of those higher costs. There’s also some accounting nitty gritty that I won’t include, for the sake of brevity.

What does this all mean? Well, record sales were mostly due to Activision Blizzard no longer being a 3rd party partner and becoming first party, however there was single-digit organic Xbox growth during the holiday season. Profit for the segment that includes gaming will take a short-term profit hit while integrating costs and following through with the deal’s financial accounting.

Here’s a quick dive into the two Xbox sub-areas, called Xbox Content & Services (i.e. software and subscriptions) and Xbox Hardware.

For October to December, the vastly larger Content & Services jumped up nearly 70% when measured by revenue. The first figure was above guidance, while the second technically under-performed at least based on what I calculated because Microsoft rarely, if ever, issues formal hardware forecasts.

The reason I say “nearly 70%” is because how Microsoft reported its numbers actually indicates that Content & Services moved up 68% to $5.69 billion, another best ever number, rather than the 61% in its announcement. From what other analysts and I can tell, Microsoft seems to have excluded Activision Blizzard’s eSports sales, for whatever reason.

This leads to my estimate of $16.5 billion for Content & Services over the last 12 month. That itself is above the $15.56 billion for all of Xbox in 2022 Q2. Separately, Hardware generated $3.27 billion in the latest annual period, slightly below the last couple years.

When hearing this numbers and looking at these charts, I’ve assumed all Activision Blizzard revenue is caught in the Content & Services pipeline because it doesn’t have anything to do with console manufacturing.

Underlying the best-ever figures for the software side was another all-time high, this time for engagement. Nadella noted that, now that Activision Blizzard players are included, Microsoft’s gaming division boasts 200 million Monthly Active Users (MAUs) on mobile devices. Prior to this, Xbox’s figure overall was 120 million. Activision had 92 million in September, while Blizzard was 26 million and King totaled 238 million.

Nadella also alluded to a double-digit jump in cloud gaming hours streamed, moving up 44% in the quarter. We don’t have specifics on the actual number of hours played by its active users, only the growth rate. Plus, unfortunately, there’s still no word on Xbox Game Pass subscribers. The last update was 25 million a couple years back, and I estimated recently that it’s likely approaching 30 million though has not eclipsed it. I hope Microsoft offers a new figure this year. Yet I’m not holding my breath.

Xbox’s Hardware segment had a solid holiday, even if the result ended up below my expectations.

Console dollar sales moved up 3% in Q2, to above $1.4 billion. This was spurred on by holiday discounting for the Xbox Series X|S family, and the appeal of something like Bethesda’s Starfield. In terms of number of consoles shipped to market, I believe it slightly increased although those units sold at a lower average selling price.

“In our consumer business, the PC and advertising markets were generally in line with our expectations,” said Chief Financial Officer (CFO) Amy Hood. “PC market volumes continued to stabilize at pre-pandemic levels. The gaming console market was a bit smaller.”

It’s a curious statement. Just because it was challenging doesn’t mean it wasn’t good. Any growth right now for Xbox console revenue, even in the lower single digits, is a positive sign. Echoing my past sentiment, and it’s something gamers need to get accustomed to, is that Xbox’s strategy has officially shifted away from consoles and towards offering services on various devices.

During the last year, Hardware reached $3.27 billion. That’s down 9% from the same time in 2022, though above pre-pandemic figures. Again, this tracks with the general theme.

Since Microsoft doesn’t provide global unit sales like peers do, I have no choice but to guesstimate where they stand. For the holiday quarter alone, I backed into 3.5 million to 4 million shipments for Xbox Series X|S. This would be in-line with last year, albeit below the roughly 4.5 to 5 million that its Xbox One predecessor was doing during its prime.

I put Xbox Series X|S lifetime at 25.5 million or so prior to this latest three month report. Which was below the 26 million of Xbox One. Adding on my estimated holiday shipments for the family, I believe Xbox Series X|S stands currently at 29 million to 29.5 million units lifetime since November 2020. Thus, it remains tracking below Xbox One by upwards of a couple million.

For comparison, Sony’s PlayStation 5 was the best-selling console in key regions during 2023, including the United States as I covered recently. The console reached 50 million units sold to consumers in December 2023, and the shipment figure will be even higher when Sony reports in a couple weeks.

Overall at Microsoft during Q2, revenue jumped 18% to $62 billion. Operating profit rose 33% to $27 billion. Microsoft Cloud grew 24% to 33.7 billion. Executives provided some color around how the Activision Blizzard deal affected the full firm’s financials.

“At a company level, Activision Blizzard contributed approximately 4 points to revenue growth, was a 2 point drag on adjusted operating income growth, and a negative 5 cent impact to earnings per share. This impact includes $1.1 billion from purchase accounting adjustments, integration, and transaction-related costs such as severance-related charges related to last week’s announcement.”

That’s referencing last week’s Xbox group layoff announcement, which came after a year of more than ten thousand people losing their jobs at the broader company.

To wrap up the latest quarter, it’s important to look behind the absurd 49% growth and big figures due to integrating Activision Blizzard. There has to be consideration for what numbers look like when combining the two historically, plus the notable downside profit effect for the time being. Not to mention the painful layoffs that happened mostly because of the deal taking place.

In terms of dynamics and future of the Xbox division, these don’t necessarily change with the latest new acquisition. The numbers are bigger, and the portfolio certainly has more brands especially on the mobile side with the unsung King division, while various challenges remain especially on the hardware front plus with industry-wide service stagnation and general costs rising.

I’m also lamenting the lack of details into Activision Blizzard’s underlying financials. We’ll never see them ever again. Pour one out, fellow business nerds and data transparency advocates.

Here I’ll take the chance to look ahead to the third quarter, and make some predictions on the immediate future of Xbox.

Management expects Xbox division sales growth “in the low 40s,” so between 40% and 44%. Out of that, management signaled 45 points would be due to Activision Blizzard. Yes, this means that Microsoft is saying its non-Activision Blizzard Xbox sales will likely decline in this current quarter.

Assuming say 42% growth, that puts Xbox sales at $5.12 billion in the three months ending March 2024. Which, you guessed it, would be a Q3 record. I believe this will be met, though on the lower end.

For Xbox Content & Services, Hood said to anticipate growth “in the low to mid-50s” i.e. around 50% to 57%. Most, if not all of that, will be Activision Blizzard causing a net impact of 50 points or 50%.

Let’s say it gets to 54%, that would elevate Content & Services to $4.77 billion in Q3. Again, I expect that to be achieved, and I think there’s a good chance it hits the upper end.

Finally, management actually provided Hardware guidance! Well, somewhat. They think it will decline. That will certainly be the case if the other numbers hold. As in, console sales could be down by as much as 30%. Based on how they presented numbers this time, I’m guessing around a 5% to 10% decline for console in Q2 which would equate to around $450 million to $480 million.

The early year release slate for Xbox is a tad light, so I’m thinking evergreen titles and the Call of Duty effect being first party will drive the business to hitting these forecasts. In terms of new games, Sega’s Like a Dragon: Infinite Wealth hit a million units yesterday. Warner Bros’ Suicide Squad Kill the Justice League formally launches today, and I’m skeptical on its commercial upside, just like I am for Ubisoft’s Skull & Bones this month. There’s titles like Tekken 8 from Bandai Namco, which I’m quite upbeat on, and Capcom’s Dragon’s Dogma 2 in March that should attract a cult following.

Will these be the biggest software contributors of the quarter? Nope. It’s Palworld, the surprise console exclusive that’s garnering a lot of attention from consumers and pundits alike. It’s much more than the “Pokémon with Guns” moniker, and has been a near unprecedented sales success. So far, Pocket Pair’s latest reached more than 19 million players, 7 million of those on Xbox alone. It’s the largest third party launch in Game Pass history, beating out 2022’s High on Life, and instantly shot to the top of the service’s most-played chart. I’m on record saying it will end the year as one of the platform’s biggest titles. Frankly, it’s absurd and I love it.

That ends the first massive recap of the latest season. Follow me on social for coverage in between articles, and check back soon for more here at the site. Be well!

Note: Comparisons are year-over-year unless otherwise noted.

Sources: Circana, Company Investor Relations Websites, Pocket Pair, Sega.

-Dom

Circana Reports U.S. Games Industry Sales Growth in 2023 on Strength of Hogwarts Legacy, Monopoly Go & PlayStation 5

That’s right, it’s the final U.S. sales recap of 2023. A bit late, but here we are!

Earlier this month, Circana announced its December and full-year 2023 report on domestic games industry consumer spending. Both respective time frames showed slight growth, thus ending a shaky 12 months on a positive note.

Within the December holiday month, total sales rose a healthy 4% to $7.9 billion. Which means that overall, U.S. consumers spent more than $57 billion across gaming last year, an increase of 1% compared to 2022.

Two segments in Content and Accessories each moved up in the single digits during the year while Hardware output remained virtually flat.

On the premium software side, while Call of Duty: Modern Warfare 3 did secure the top spot in December, it couldn’t quite sell enough to outpace what ended 2023 as the year’s top seller: Hogwarts Legacy.

This win for Warner Bros marks the first time since Rock Band in 2008 that a game not in Activision Blizzard’s Call of Duty shooter franchise or made by Grand Theft Auto developer Rockstar Games led the yearly list. An exceptional, and mostly unexpected until right up until the final month, result.

A huge portion of the Content category is dictated by mobile where Monopoly Go became the big earner for both December and the year as a whole.

Elsewhere, Sony’s PlayStation 5 generated better supply throughout the year and saw consistent demand plus boasted a system-seller in Marvel’s Spider-Man 2, accelerating the family of consoles to best seller for December and 2023 when measured by both unit sales and dollar revenue.

“A 13% increase in spending on digital premium downloads on console platforms helped offset declines in physical software spending,” wrote Circana’s Mat Piscatella when talking about the year overall. “Growth in PlayStation 5 hardware dollar sales helped offset declines across both Xbox Series and Switch.”

No more time to waste. Read on for my full rundown, numbers and all, then a look ahead to 2024!

United States Games Industry Sales (November 26th to December 30th, 2023)

Across all of gaming during the holiday month, spending rose 4% to $7.91 billion. 2023 sales eclipsed $57.19 billion, up 1%. The largest contributor to growth was full game digital on consoles, highlighting the continued buyer shift towards downloads rather than retail purchases.

The biggest category of Content rose 3% in December to $5.73 billion, or 72% of the total which is slightly below the 73% a year ago. In aggregate across all of 2023, it moved up 1% to $47.97 billion. That’s an 84% contribution, same as 2022.

Mobile generated yet another month of gains, this time seeing spending increase 2.7% over the same time last year. All of the Top 10 earners experienced higher contributions than they did during November. December’s leading games were, in order of revenue, Monopoly Go, Royal Match, Roblox, Candy Crush Saga and Clash of Clans.

The report wasn’t specific about mobile’s contribution to the total 12 month period, however it did outline 2023’s Top 10 games by sales, which I’ve listed in full later in the article. Scopely’s Monopoly Go was the winner, followed by Candy Crush Saga and Roblox.

December’s premium software ranks showcased a number of familiar titles that launched in or before the month, with the only new game being Ubisoft’s Avatar: Frontiers of Pandora debuting in the 6th spot. Which I’d call quite a good start for the year’s last major AAA release.

As expected, Call of Duty: Modern Warfare 3 was the holiday month’s best seller. Next up was Super Mario Bros. Wonder moving up a few spots to 2nd, even without digital sales counted. It’s yet another fantastic showing for Nintendo, just ahead of Electronic Arts’ Madden NFL 24 rounding out the Top 3 as the football season entered its home stretch.

Expanding to 2023 as a whole, winner Hogwarts Legacy was the predominant sales story both domestically and around the globe. In addition to leading the annual U.S. chart, publisher Warner Bros claimed it was the world’s best-selling premium game. It generated well over a billion dollars in its first three months, moved 2 million copies globally in December alone and ending the year at 22 million. It’s now above 24 million.

Activision Blizzard claimed three titles in the Top 7, including two Call of Duty iterations in addition to Diablo IV. While technically a down year for the latest Call of Duty installment, this outcome shows the franchise is still among the top commercial successes, plus reveals that players didn’t need to move to the latest version in order to spend big money.

After Madden NFL 24 in third, Marvel’s Spider-Man 2 and The Legend of Zelda: Tears of the Kingdom, both platform exclusives, rounded out the year’s Top 5. Which makes sense for Insomniac Games’ Spider-Man sequel after its record-breaking start. This was especially impressive for Tears of the Kingdom since it’s based solely on retail. That’s right, it was among the year’s five best sellers considering only boxes sold in stores. When these days digital often accounts for half of a title’s units, if not more, this was a momentous feat for Nintendo.

Another fantastic trend was the commercial success of fighting games as both Mortal Kombat 1 from Warner Bros and Capcom’s Street Fighter 6 charted at #8 and #17 respectively. On the Xbox side, Bethesda’s Starfield, while being on Game Pass and seeing a somewhat soured sentiment since the September launch, landed just outside the Top 10 in 11th place.

In addition to the charts based on revenue, Circana shared the most played games of December by Monthly Active Users (MAUs) from each major platform. Fortnite, Call of Duty and, of course, Grand Theft Auto V led on PlayStation and Xbox while Lethal Company, The Finals and Counter-Strike Go 2 saw the biggest engagement on Steam. Huge movers into the Top 10 included PowerWash Simulator at #9 on PlayStation and Goat Simulator at #7 on Xbox. Apparently, lots of people like doing chores or acting a fool in their spare time!

Check below for December and 2023 best seller lists, including the annual Top 10 mobile earners.

Top-Selling Premium Games of December 2023, U.S. (Physical & Digital Dollar Sales):

  1. Call of Duty: Modern Warfare 3
  2. Super Mario Bros. Wonder*
  3. Madden NFL 24
  4. Hogwarts Legacy
  5. Marvel’s Spider-Man 2
  6. Avatar: Frontiers of Pandora
  7. EA Sports FC 24
  8. Mortal Kombat 1
  9. NBA 2K24*
  10. Mario Kart 8*
  11. Super Mario RPG Remake*
  12. Sonic Superstars
  13. Minecraft
  14. God of War Ragnarök
  15. Star Wars Jedi Survivor
  16. Elden Ring
  17. The Legend of Zelda: Tears of the Kingdom*
  18. Just Dance 2024 Edition
  19. Assassin’s Creed Mirage
  20. UFC 5

Top-Selling Premium Games of 2023, U.S. (Physical & Digital Dollar Sales):

  1. Hogwarts Legacy
  2. Call of Duty: Modern Warfare 3
  3. Madden NFL 24
  4. Marvel’s Spider-Man 2
  5. The Legend of Zelda: Tears of the Kingdom*
  6. Diablo IV
  7. Call of Duty: Modern Warfare 2
  8. Mortal Kombat 1
  9. Star Wars Jedi Survivor
  10. EA Sports FC 24
  11. Starfield
  12. Super Mario Bros. Wonder*
  13. Resident Evil 4 Remake
  14. MLB The Show 23^
  15. Dead Island 2
  16. Final Fantasy XVI
  17. Street Fighter 6
  18. Elden Ring
  19. Mario Kart 8*
  20. Minecraft

Top-Selling Mobile Games of 2023, U.S. (Revenue):

  1. Monopoly Go
  2. Candy Crush Saga
  3. Roblox
  4. Royal Match
  5. Coin Master
  6. Pokémon Go
  7. Gardenscapes
  8. Jackpot Party Casino Slots
  9. Township
  10. Evony

Swapping over to the Hardware category, this one gained 4% in December to almost $1.6 billion.

Circana’s report pointed out that PlayStation 5 and Xbox Series X|S generated revenue growth during the final month of 2023, while Nintendo Switch saw a double-digit percentage decline. That’s good news for Microsoft’s platform, even if it was spurred on by temporary price reductions. The last part there for Nintendo was mostly anticipated for the aging device, which is long past market saturation.

There’s no indication if the growth for either PlayStation or Xbox was in the double digits, however I’d imagine it was in the single digits since the report probably would have said so otherwise.

Topping the hardware list for December by units and dollars was, yet again, Sony’s PlayStation 5. I believe it won every month of 2023 except for May, when Nintendo Switch led on the heels of Tears of the Kingdom’s launch. In fact, Sony as a manufacturer generated a single month dollar sales all-time high in December, outpacing the prior record holder of December 2022.

Intriguingly, Nintendo Switch secured second place in December by units and revenue despite Xbox’s growth and the below comment from Circana.

“Xbox Series X|S set a new lifetime high in U.S. unit sales during the month of December,” Piscatella said on social media, documenting a new milestone for Microsoft’s latest console family. “The previous unit sales high for Xbox Series X|S was set in December 2021.”

After spending most of the year in the red, the Hardware segment’s solid holiday result moved it up to flat for the year at $6.59 billion in consumer buying.

PlayStation 5 topped the annual list by units and dollars. In fact, it was the only platform that gained ground when compared to 2022. Nintendo Switch was again the runner-up by both measures, as both Switch and Xbox Series X|S experienced declining annual sales.

Fitting with the general theme I’ve outlined in these write-ups before, 2023 was a banner year for PlayStation while Xbox maintained its inconsistency, although the latter did have certain bright spots in Starfield’s launch in September and holiday sales when discounted.

Accessories is up next, the final and fastest-growing of the three categories during both the holiday and 2023 overall.

During December, spending in this area rose 14% to $584 million. That’s a super healthy boost during the final month as people who purchases new generation consoles are now scooping up peripherals, including special editions and high-end controllers.

United States buyers purchased $2.64 billion accessories during the year, an increase of 4%. The report shouted out growth from game pads in particular.

Fitting that theme, Sony’s PlayStation 5 Dual Sense Edge was the top-earning accessory of 2023, after the premium pad won most months. Its continued momentum shows there’s ample demand for premium priced peripherals as the console cycle matures.

From a domestic spend perspective, 2023 was the definition of up and down, at least compared to the prior year. Exactly half of the twelve months showed spending growth, while all others saw lower sales than their 2022 counterparts. Only two months, May and September, produced double-digit gains.

There was a distinct lack of consistency, even with blockbuster launches and Sony’s concerted effort to produce more PlayStations. A return to hardware supply helped, as did mobile’s better contribution. Still, Nintendo Switch is long in the tooth, subscriptions are stagnant and the most recent Call of Duty installment under-performed.

“Subscription growth has flattened,” Piscatella wrote on Twitter. “And subscription services on console and PC platforms accounts for only 10% of total video game content spending in the U.S.”

In a broader historical sense, over a timeline including before COVID, it was still one of the best years of consumer spending in tracked history. Unfortunately, spending remains in stark comparison to the games industry labor market, which suffered a record number of layoffs globally in 2023 and is only accelerating early this year.

Speaking of 2024, it’s now time for my official predictions. I wrote a whole article with my expectations across the global industry, so here I’ll focus on solely what I expect from the domestic Circana reports before signing off.

In general for spending and where it’s going, I’m leaning towards keeping with my global prediction in that I expect the year to be close to flat with slight upside in the low single digits. That does include my assumption that Nintendo will in fact launch a Switch successor in the final calendar quarter.

Premium software is somewhat tricky considering the release slate is up in the air, especially for PlayStation and Nintendo. I think the rumored Call of Duty: Black Ops Gulf War will bring the franchise back to best seller status.

Beyond the sports games that will always appear, Star Wars Outlaws from Ubisoft will compete for a Top 5 spot if it’s out, as will a mainline Super Mario assuming it launches with Super Switch. Final Fantasy VI Rebirth has a good chance at Top 10 even on a single platform, and Tekken 8 will have a strong showing in the Top 15. I’m not expecting Marvel’s Wolverine to be out and don’t know what the heck to think about Suicide Squad Kill the Justice League, so I’ll say that one misses the Top 20. Just like Skull & Bones.

Hardware will be a juicy category. It’s almost a lock that Super Switch will be out in the back half. I’m on record saying I think adoption will start a tad slower than the original, then pick up over time. Considering Sony’s push to produce PlayStation 5 to make up for lost time during the pandemic, and its at least six to eight month head start, my bet is PlayStation 5 will take home hardware for 2023 with Nintendo as a close second, especially on units.

And, of course, I couldn’t leave without mentioning Palworld! I believe January’s big sales surprise, moving 8 million copies on Steam and topping the Xbox Game Pass list during its debut week, will be among 2024’s most-played titles. Especially if it leaves early access and launches on PlayStation.

That’s officially it for 2023. I highly recommend checking out Piscatella’s Twitter thread for the full Circana report, including individual platform charts and more engagement stats.

Be well, and see you soon for more this year!

Note: Comparisons are year-over-year unless otherwise noted.

*Digital Sales Not Included

^Xbox & Nintendo Digital Sales Not Included

Sources: Circana, Warner Bros.

-Dom

Seven Major Games Industry Predictions for 2024

Now that I’ve looked back with my 2023 Year-in-Review, which I still highly recommend reading to catch up on trends, games and studios you might have missed, it’s officially time to move into the new year!

After a legendary twelve months of game releases amidst a disastrous time for the industry’s labor market, I believe uncertainty and volatility are set to define 2024. There will be challenges, and plenty of them, yet also select opportunities on which to capitalize. I see a future with new hardware, labor issues and new service launches from key players, among other things.

Rather than make general statements, which are far too easy, I try to make my predictions quantifiable somehow, or at least be as specific as I can, to hold myself accountable. Plenty of people make predictions; not many grade themselves. For instance, here’s my results from last year:

  • Microsoft & Activision Blizzard Deal Closes in Calendar 4th Quarter: Correct.
  • Nintendo Goes Another Year Without Announcing a Switch Successor: Correct.
  • Global Games Industry Value Returns to Growth & Passes $188 Billion: Partially Correct.
    • It grew, albeit not as much as I expected.
  • PlayStation 5 Wins Best-Selling Console in the U.S. Yet Misses Sales Targets: Correct.
    • Well, so far. I would also argue Sony is tracking below its PlayStation 5 fiscal target.
  • Xbox Game Pass Price & Subscription Base Increases: Partially Correct.
    • Cost to consumer went up, though Microsoft refused to share user base stats.
  • Special Year of Fighting Game Releases & Announcements: Correct.
  • Amazon Games Makes Massive Studio Acquisition: Incorrect.
  • Bonus: Bungie Announces & Launches Destiny Universe Transmedia Property: Incorrect.

Not bad, right! Now, check a look below for seven predictions for 2024 covering the games industry at large. Plus, as usual, a super bold bonus guess mostly for fun.

Happy New Year everyone.

Super Nintendo Switch & New 3D Mario Release in Fourth Quarter

I’ll get an obvious one out of the way. In fact, I’ll make it a bit harder by attempting to guess exact things for what’s inevitably going to be the year of Nintendo’s next hardware launch. The company’s next hardware will be called Super Nintendo Switch. It will again have a hybrid portable and console setup, will launch with one model in October, and cost $400 to start.

Alongside, Nintendo will product a mainline 3D Mario as a launch title. It won’t be a sequel to 2017’s Super Mario Odyssey. It will be an open world with various areas and secret levels. It will be called Super Mario [Something] 3D. In addition to this, I’m guessing a motion game launches day-and-date plus a mainline Animal Crossing and Mario Kart will both be out within its first year. The device will, after a somewhat slower start as adopters move on, end up following a similar trajectory as its predecessor within three years. That’s right, I’m officially done underestimating Nintendo.

Difficult Labor Market Continues as Major Publishers Reduce Workforce

This is absolutely the most painful prediction to write, mainly because it’s a carry-over from last year that I don’t think will stop any time soon. During January to December 2023, Games Industry Layoffs estimated that upwards of 9,000 jobs were cut across the sector. I believe that anyone hoping for a more cheerful 2024 for hiring or even stability will, unfortunately, be disappointed.

After years of low interest rate borrowing, higher-than-usual consumer demand and expansion by many firms, I’m expecting even more layoffs and even studio closures in 2024, especially at the top-end, AAA level. Within the first week of January alone, Surgeon Simulator maker Bossa Studios laid off a third of its employees and further losses were reported at Embracer Group’s 3D Realms and Slipgate Ironworks. I believe we’ll see a further contraction of more than 3,000 to 5,000 jobs, with at least two major publishers announcing 5% to 10% workforce reductions.

Microsoft Xbox Mobile Store & Big Name Activision IP Announcements

Here’s a two-for-one. A natural progression of Microsoft’s service-oriented strategy will be developing a dedicated Xbox mobile distribution platform that integrates Game Pass and cloud offerings. I anticipate it will both reveal and release this sort of storefront in 2024, let’s say between June and December. It will simply be called Xbox Mobile. This move is advantageous from various perspectives, in particular for maximizing platform fees, diversifying its offerings, controlling content flow, appealing to potential partners and expanding its audience base across devices. Can it truly compete with Apple and Google’s market share? Well, you won’t see me betting on that.

That brings me to the second part of the prediction: Now that the Activision Blizzard deal is done, I believe the team will revive certain brands, especially those that can round out the Game Pass portfolio and even crossover to mobile. Within the next 12 months, I’m thinking the team will announce the following: new Skylanders and Tony Hawk’s Pro Skater iterations, both being ongoing platforms and revenue generators. Once the mobile store and larger brand IP are established, Xbox will move into Spyro the Dragon and Phil Spencer’s beloved Hexen, which I don’t expect to be revealed until at least 2025. I’m much more skeptical on others, for instance a Guitar Hero revival.

Sony Launches PlayStation 5 Pro & Spider-Man 2 Expandalone in November

Not to be outdone by Nintendo, I’m thinking fellow Japanese hardware maker Sony kicks off its mid-generation console refresh this year. While it feels like just yesterday the platform holder launched the PlayStation 5, partly because of a global pandemic making the passage of time irrelevant, it’s now over three years into the latest cycle. Thus, I’m expecting a boosted PlayStation 5 Pro announcement sometime in the third quarter and a quick turnaround to release in the beginning of November 2024.

Along these lines, I’m going to say star studio Insomniac Games is cooking up what I call an “expandalone” for its 2023 hit Marvel’s Spider-Man 2, similar to the Miles Morales counterpart to 2018’s Marvel’s Spider-Man. (Mild spoiler warning!) This will be a solid 8 to 10 hour experience, it will hit market on the same exact day as the new console model, boast a range of performance options to show off the fancy tech and feature the webbed buddies facing off against Carnage as the primary villain.

Total Global Games Industry Value Will Remain Virtually Flat

In the last quarter of 2023, NewZoo estimated the global games industry did exhibit growth during the year even with a slew of challenges, moving up under a percent to $184 billion in value. The largest contributor of Mobile accounted for over $90 billion, down 2% as this segment stagnated during the year. It was Console and PC software, including full game digital downloads, driving upward momentum with those segments moving up 5% and 2%, respectively.

This year, I’m leaning towards caution for 2024 and think the global industry will remain virtually flat, with slight downside in potential negative territory. This would be notable as only the second decline of the last 16 years, alongside 2021 to 2022. I am guessing $183 billion to $184 billion for the full year. Partly because of a tough comparison against a stacked release calendar, between the out-performance of Hogwarts Legacy and The Legend of Zelda: Tears of the Kingdom among others. I expect minimal mobile momentum to remain, as well as subscription stagnation and a heavy reliance on a new Nintendo console that could have a slower adoption rate. There is some decent upside if my PlayStation 5 Pro prediction hits, because I do expect a good holiday season for Sony regardless.

AI Usage Ramps as At Least Two Big Titles Embrace Generative Voice & Writing

It’s time for the dreaded buzzword bro: Artificial Intelligence! As much as people don’t like AI, or misuse the term, it’s part of our collective future and is already an integral part of making games. It has been for a while within an industry that blends art and technology, as various notably projects have already used some form of it to assist human developers. Recent examples include Ubisoft writers leveraging it for non-playable character chatter, Squanch Games having AI artwork in High on Life and The Finals from Embark Studios features generative text-to-speech.

I expect this sort of AI-assist development tech to take an even more prominent role in 2024. How will I quantify this prediction? I believe that at least two major publisher titles will heavily feature something like AI-enhanced primary characters or substantially aiding the writing team with main or side quest lines. Candidates include Ubisoft, Square Enix and even PlayStation Studios, the last of which has done great work with accessibility features, a fantastic opportunity area for this exact sort of development workflow enhancement.

M&A Cautiously Continues With Acquisitions by Saudi Arabia’s Savvy Games & Netflix

Last year’s merger and acquisition (M&A) valuation was skewed by Microsoft’s monumental $69 billion takeover of Activision Blizzard. Before that closed in October, companies weren’t as active in terms of deal value through the first nine months of 2023 according to a global report from Drake Star. There were 746 deals valued at $18 billion, down from 626 deals at $51 billion during the same time in 2022. Similar to my sentiment right now, there’s a lot of uncertainty around things like rates and jobs, which is why I believe that 2024’s deal landscape will be selective rather than massive.

Even so, there will always be moves made by key players. I expect a couple of those to be Savvy Games and Netflix. The former is the gaming investment vehicle of Saudi Arabia’s government, which is throwing cash at various sectors including tech, while the latter is hellbent on pushing games to its millions of subscribers. Might a name like CD Projekt be appealing to these kinds of buyers after a stock price decline? (I’d say so.) Might a platform holder named Sony be interested in spending big bucks on a Ubisoft or Capcom? (Eh, I don’t think so.) Finally, which business will Embracer spin off to pay down its debt and which company might subsequently buy them? (I’d wager Gearbox Entertainment or Coffee Stain, or both.)

Bonus & Bold: Bungie Concludes The Final Shape With Destiny 3 Announcement

That’s right, it’s time to finish with a pipe dream! Yes, it’s a mostly absurd one. It’s something I want more than expect to happen. I acknowledge Bungie got rid of a reported 100 folks, or 8% of staff at the time, back in October. It’s making a huge push towards The Final Shape expansion, the huge finale of Destiny’s decade-long saga. A good portion of the team is actively focusing on extraction shooter and likely 2025 launch Marathon.

I’d still wager the talented folks at Bungie are drafting up something more substantial for the future of Destiny that isn’t just the announced periodic episodes once the latest expansion concludes in June. Plus, it’s a bloated game with a reportedly dated development process that drastically needs a reset. Which is why I think the third mainline Destiny franchise title will (realistically probably not) be announced this year, and (is super unlikely to) launch subsequently in 2026!

Note: Comparisons are year-over-year and dollars are in US$ unless otherwise noted.

Sources: Bloomberg, Company Investor & Media Websites, Drake Star, Drexel News Blog (Image Credit), Games Industry Biz, NewZoo, Video Games Chronicle, VideoGameLayoffs.com.

-Dom

U.S. Games Industry Sales Decline in November 2023 Circana Report Despite New Best-Selling Call of Duty

The year is nearly done. Which means the States are getting chillier, Baldur’s Gate 3 won The Game Awards and this will be the last monthly sales report recap that I’ll write before the calendar turns to January.

Before you know it, I’ll be posting my annual Year-in-Review series. There, I’ll talk about how it’s been an amazing year for game releases yet a very difficult one for working in games. Here, I’m sending all my best to the thousands impacted by layoffs this year and my heartfelt thanks for their work and dedication to their craft.

In terms of the U.S. industry itself, tracking firm Circana recently released its November spending report. It turned out to be a down month as sales declined 7% to $5.87 billion, a lower-than-expected result during the coveted Black Friday month partly due to the console category dropping more than 20%.

This is the second month in a row of spending declines, as October showed a similar dynamic.

The two largest segments, Content and Hardware, both saw lower spending than November last year. Only Accessories experienced growth, and a modest amount at that. Not even ample supply, the PlayStation Portal launch or a brand new Call of Duty could propel towards broader gains last month.

The latest installment Call of Duty: Modern Warfare 3 secured the top spot on the premium software chart during November. This means Activision Blizzard’s military shooter franchise has led its launch month for a staggering 16 years straight. Even so, signs point to a weaker start than its predecessor, and there’s a chance the series will be dethroned in the final 2023 rankings.

“It’s not to say that Modern Warfare 3 is doing poorly (it is already the 2nd best-selling game of 2023 after all),” Circana’s Mat Piscatella told IGN. “But no it is not currently meeting what Modern Warfare 2 did a year ago.”

On the console front, Sony’s PlayStation 5 continued its monthly dominance as it outsold all competitors measured by dollars and units. Similar to its performance in every month this year except for May, when Nintendo Switch led due to a new Zelda, well on its way to securing a win for the full 12 months.

Overall spending across the industry in 2023 still remains ever-so-slightly positive. Earlier monthly gains due to Hogwarts Legacy and The Legend of Zelda: Tears of the Kingdom plus a steady mobile resurgence are carrying weight. It all comes down to December, as this month’s performance will dictate where the year ends up.

Scroll down for a full recap of the figures and my final set of predictions this year.

United States Games Industry Sales (October 29th, 2023 to November 25th, 2023)

Total money spent across all of gaming in November was $5.87 billion, or 7% lower than a year back. The downward movement was attributed to a lack of flagship system launches for both PlayStation and Nintendo, which November 2022 had in God of War Ragnarök, Pokémon Scarlet and Pokémon Violet, alongside generally weaker demand in the console space.

After accounting for this latest result, sales for 2023 are currently trending upwards by 1% to $49.28 billion.

The primary contributing segment of Content dipped 3% in November to $4.6 billion, thus making up 78% of the whole. Compare that to last year’s 75% slice.

“An 11% decline in Console & Portable Content spending was partially offset by 3% growth across each of the Mobile, Subscription, and PC, Cloud & Non-Console VR Content segments,” Piscatella noted.

Mobile is now showing consistent growth, even if it’s in the single digits, a solid reversal of where it was earlier in the year. MONOPOLY GO! repeated as the top monthly earner, followed by Royal Match, Roblox, Candy Crush Saga and Coin Master.

The release slate in premium software has slowed leading into year-end, though there were still four new titles among the Top 20, with two of them among the Top 7.

Call of Duty: Modern Warfare 3 started in that top spot, as it often does. This marks five straight Novembers led by a Call of Duty game, dating back to 2019. After Call of Duty: Black Ops 4 and Red Dead Redemption 2 launched in October 2018, a month won by the former, the latter went on to take November 2018.

October’s leader Marvel’s Spider-Man 2 came in second during its second month, while Hogwarts Legacy bounced back into the Top 3 due to its Nintendo Switch launch as Warner Bros. title in the Harry Potter universe was the second top-selling title on that platform.

Nintendo’s Super Mario Bros. Wonder retained a high position at #5, while the publisher’s newest release Super Mario RPG Remake debuted in 7th. Bandai Namco’s Naruto x Boruto: Ultimate Ninja Storm Connections landed at #12, while Star Ocean: The Second Story R from Square Enix launched at #17.

With respect to Monthly Active Users (MAUs), Fortnite moved up to the most played position on both PlayStation and Xbox ecosystems, surpassing the Call of Duty HQ launcher, while Valve’s Counter-Strike 2 secured Steam’s top engagement. Lethal Company from indie team Zeekerss was the big mover on PC, jumping from 115th in October to 2nd in November.

In terms of the annual list approaching the end of 2023, Hogwarts Legacy is still leading, just above the newly-launched Call of Duty: Modern Warfare 3 at 2nd with less than a month of tracked sales. There are now two Call of Duty titles among the annual ranks, with 2022’s Modern Warfare 2 is #7. The Legend of Zelda: Tears of the Kingdom dropped to 3rd. The biggest mover was Super Mario Bros. Wonder, moving into 15th place after starting October outside the Top 20.

See below for the full list of November top sellers and full-year with only a month to go!

Top-Selling Games of November 2023, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Call of Duty: Modern Warfare 3
  2. Marvel’s Spider-Man 2
  3. Hogwarts Legacy
  4. Madden NFL 24
  5. Super Mario Bros. Wonder*
  6. EA Sports FC 24
  7. Super Mario RPG Remake*
  8. Mortal Kombat 1
  9. NBA 2K24*
  10. UFC 5
  11. Assassin’s Creed Mirage
  12. Naruto X Boruto: Ultimate Ninja Storm Connections
  13. Sonic Superstars
  14. Star Wars Jedi Survivor
  15. God of War Ragnarök
  16. NHL 24
  17. Star Ocean: The Second Story R
  18. Marvel’s Spider-Man: Miles Morales
  19. Minecraft
  20. Just Dance 2024

Top-Selling Games of 2023 So Far, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Hogwarts Legacy
  2. Call of Duty: Modern Warfare 3
  3. The Legend of Zelda: Tears of the Kingdom*
  4. Marvel’s Spider-Man 2
  5. Madden NFL 24
  6. Diablo IV
  7. Call of Duty: Modern Warfare 2
  8. Star Wars Jedi Survivor
  9. Mortal Kombat 1
  10. Starfield
  11. Resident Evil 4 Remake
  12. EA Sports FC 24
  13. MLB The Show 23^
  14. Dead Island 2
  15. Super Mario Bros. Wonder
  16. Final Fantasy XVI
  17. Street Fighter 6
  18. FIFA 23
  19. Elden Ring
  20. Remnant II

Hardware ended up being the most surprising part of the whole report, moving down 24% to $964 million, as opposed to over $1.27 billion in November 2022.

This means the segment has now turned negative for 2023, currently down 1% to $4.99 billion.

Declines certainly weren’t isolated to a single platform. Revenue for PlayStation 5, Xbox Series X|S and Nintendo Switch all dropped double-digits last month, with the Nintendo Switch experiencing the most precipitous drop. On units, while Xbox Series X moved up against last November, Xbox Series S sales were lower, thus dragging down that device family.

This result undoubtedly missed my expectations, which weren’t even that upbeat after October. Rather than supply, this is squarely on the demand side as people have already been purchasing the latest generation of devices and weren’t enticed by slight discounting or bundles. Also, buyers didn’t see a must-have exclusive on any platform last month, something that usually drives interest.

“Instead of seeing huge growth because we were comparing to a supply constrained market (like we saw last year), we’re seeing the reverse now,” Piscatella explained. “Where we are comparing to a period of elevated supply and existing demand getting satiated. This comp issue is going to be a challenge in December as well and will finally start settling out in January.”

Sony’s PlayStation 5 again led November, with the most units sold and dollars generated. Xbox Series X|S was the runner-up, while Nintendo Switch slotted in third.

Then there’s a newcomer in PlayStation Portal, a cloud peripheral oddly classified as hardware rather than an accessory even though it requires a console to even function. Well, it debuted in fourth place. Its output wasn’t helped by PlayStation shipping a low supply as anecdotally it’s been selling out at every retailer when there is stock available.

Across all of 2023, PlayStation 5 remains first for the year by units and dollars. Nintendo Switch is currently trending in second place by both as well.

Speaking of Nintendo Switch, Circana shared a quick tidbit. And we love tidbits! It passed the lifetime unit sales of Xbox 360 during November. It’s now behind only Nintendo DS and PlayStation 2 on the all-time domestic list.

Our final segment of Accessories is up next, and it’s the only one that showed growth. Sales here were up 3% to $303 million. Circana shouted out game pads in particular, which moved up 8%.

Intriguingly, this happened without the inclusion of the aforementioned PlayStation Portal. Which means it’s due to mostly existing peripherals and controllers. I’d imagine that instead of putting cash towards consoles, people in the U.S. were more interested in scooping up various accessories for the devices they or their families and friends already own.

Accessory sales are looking up 1% to $2.05 billion if expanding to the full year at present.

November’s best-selling device was Sony’s PlayStation 5 DualSense in midnight black, repeating its win from October.

I assume the PlayStation 5 DualSense Edge game pad remains the year’s top seller, although the report wasn’t specific in this regard. I’ll update this piece if I receive confirmation of this point.

While November was more lackluster than I expected, especially for console sales, spending declines were partly because of a high comparable last year and a softer Call of Duty start compared to its popular predecessor.

After back-to-back negative reports in October and November, there’s a whole lot of pressure on December to secure a fourth quarter to end 2023 on a high note. Personally, I’m not quite sure it’s going to get there, as I’ll now move into a quick set of predictions.

First, December. The big holiday month is upon us. While there’s plenty of enticing games to purchase in a year of incredible releases, I’m thinking overall monthly spend will be effectively flat, driven by a lack of new releases and continued downward pressure in hardware demand.

I think mobile will keep its solid momentum in Content, while a number of familiar faces will appear on the premium sellers list. Ubisoft’s Avatar: Frontiers of Pandora is the only AAA launch this month. I think it will have a Top 7 start, even during the busy holiday blast. Expect Call of Duty: Modern Warfare 3 to repeat as the top seller.

Within Hardware, I’m leaning towards a single-digit revenue decline in December. Microsoft announced a substantial price cut for the Xbox Series X yesterday, dropping it by a hundred bucks for a limited time. Even considering that, I believe PlayStation 5 tops December with Xbox Series X|S next up.

Now, what about the year as a whole? Circana and Piscatella are now weary of their original 3% growth prediction for 2023. Personally, I think a flat December will bring the year to effectively even, with slight upside towards 1% growth. Essentially, due to a declining fourth quarter, consumers will spend about the same amount as 2022.

Hardware is an easy call, as PlayStation 5 will undoubtedly sweep 2023.

The big question is for Content: Will it be the first time since 2008 that a Call of Duty or Rockstar Games title like Grand Theft Auto or Red Dead Redemption doesn’t win?

It’s a distinct possibility, especially with a shaky start for Modern Warfare 3. I’m usually stubborn. This time, similar to my The Game Awards prediction of Baldur’s Gate 3 winning (which happened), I’m updating my expectation. I now think Hogwarts Legacy will be the year’s best premium seller, breaking Activision Blizzard and Rockstar Games streak in a shocking upset.

Thanks for checking out this big recap. I recommend reading through Piscatella’s Twitter thread which has more details on Circana’s latest monthly report.

Check back soon for my annual Year-in-Review series. Happy Holidays to all!

Note: Comparisons are year-over-year unless otherwise noted.

*Digital Sales Not Included

^Xbox & Nintendo Digital Sales Not Included

Sources: Circana, IGN.

-Dom

Spider-Man & Mario Highlight a Down Month for U.S. Games Industry Sales in October 2023 Circana Report

Here I am with another domestic sales recap, beginning the final quarter of results for 2023!

October’s numbers are in from industry tracking firm Circana, who revealed the winners of last month’s big battle for supremacy during the year’s busiest time for new game releases.

Despite all the premium software launches, total spending across the U.S. declined 5% in October to just over $4 billion. All of the three major segments of Content, Hardware and Accessories saw lower sales, with Hardware suffering the worst loss over 20%.

That said, 2023’s annual spend remains trending upwards as each category is pointing towards growth rates in the single digits.

The main reason behind October having lower spending, which I apologize for not pointing out last month, was Call of Duty launched last October while this year’s title didn’t hit until November. This led to a strong October 2022, and a difficult comparison against which last month had to contend.

“Growth in physical console software and mobile spending was offset by declines in other areas,” said Circana’s Mat Piscatella. “Particularly digital premium downloads driven by the release date shift of Call of Duty.”

There were still plenty of success stories. October had nine new titles among the Top 20 premium best sellers list, six of which settled within the Top 10. All of them within existing franchises, mind you, as is often the case in a world of brands and sequels.

The biggest among them being Marvel’s Spider-Man 2 which swung a victory as the month’s top earning game, experiencing a notable boost from leading on physical sales in particular. Congrats to everyone who participated in my poll and voted for Sony’s latest blockbuster hit!

It follows that Super Mario Bros. Wonder came in second place, with the usual caveat that Nintendo doesn’t share digital sales here for its published titles.

Supported by the system-seller that is a new Spider-Man game, Sony’s PlayStation 5 again led the Hardware segment. As it has most months this year except for May, trending towards winning 2023 overall in a fully-supplied environment.

Scroll down to get right into October’s data and lists, then my predictions for November.

United States Games Industry Sales (October 1st to October 28th, 2023)

Overall, consumers spent $4.04 billion across gaming in the U.S. during October, or 5% less than last year’s $4.27 billion. This lack of growth, despite all the great starts for software and healthy console dynamics, displays the power of Call of Duty: Modern Warfare 2 launching in last year’s corresponding period. It’s truly a rising tide that lifts all boats.

This latest sales number means 2023 is now tracking up 2%, towards $43.42 billion.

As the largest contributing segment, Video Game Content moved down 4% in October to $3.56 billion. It made up 88% of spending, compared to 86% a year back. Circana attributed it partially to lower downloaded games, even as physical console and mobile gained.

The Content category, which includes software, add-ons and subscriptions, is trending up 1% year-to-date to $37.64 billion.

Mobile was one of the bright spots, a trend we haven’t seen much in 2023. Spending in this area rose 2%, with the report highlighting a consistency among the top games and a notable jump for Clash of Clans back into the Top 10. October’s biggest mobile earners were, in order: MONOPOLY GO!, Royal Match, Roblox, Candy Crush Saga and Pokémon GO.

A variety of new launches bolstered premium software, more than I can remember compared to any month this year.

Marvel’s Spider-Man 2 web-launched above all others during its impressive debut, with launch month sales This year’s Insomniac Games’ open world comic adventure is already the 4th top seller of 2023 even with less than a month of tracking, a monumental win for Sony’s first party that benefited from huge physical sales and a higher price point.

Here’s where Super Mario Bros. Wonder slotted, in 2nd on the overall list and the leader of Nintendo Switch as a platform. It just missed the Top 20 for 2023 to date, at numero 21. Being the first 2D Mario title in over a decade, it’s hard to make legit comparisons for the domestic charts. So I’ll use Switch titles instead. Both Super Mario Odyssey and New Super Mario Bros. U Deluxe reached third during their respective debuts.

Rounding out the Top 3 was Assassin’s Creed Mirage, which continued as a quiet seller echoing recent announcements from Ubisoft on its successful start. Even as a more focused, lower-priced title than its recent predecessors. It began one spot below Assassin’s Creed Valhalla, which debuted in 2nd during November 2020, and the same position as Assassin’s Creed Odyssey in 2018.

Next up for new titles were two annual sports releases in UFC 5 and NHL 24 scoring 7th and 8th, respectively. This means Electronic Arts published four of the Top 8 titles, echoing its live service and ongoing game narrative.

Sega’s Sonic Superstars landed next at #9. For comparison, Sonic Frontiers sped to 4th last November. Beyond the Top 10, Metal Gear Solid: Master Collection Vol. 1 from Konami reached #12, Xbox’s Forza Motorsport reboot finished in 17th and CI Games’ Lords of the Fallen snuck on the list at #20.

You may notice one critical darling that’s missing from October. As I anticipated, Alan Wake 2 didn’t chart. The reasoning is pretty clear. Remedy Entertainment’s latest didn’t have a retail release and publisher Epic Games does not share digital sales. Meaning none of its sales were even counted in this context, thus it’s not comparable to more traditional software starts.

Moving briefly to the annual list right now, the Top 3 remained constant: Hogwarts Legacy, The Legend of Zelda: Tears of the Kingdom and Madden NFL 24. Then there’s the only new entry in Marvel’s Spider-Man 2, knocking Mario Kart 8 out of the Top 20 for the first time all year.

Check below for October’s aggregate premium rankings and 2023 so far.

Top-Selling Games of October 2023, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Marvel’s Spider-Man 2
  2. Super Mario Bros. Wonder*
  3. Assassin’s Creed Mirage
  4. Madden NFL 24
  5. EA Sports FC 24
  6. Mortal Kombat 1
  7. UFC 5
  8. NHL 24
  9. Sonic Superstars
  10. Hogwarts Legacy
  11. Call of Duty: Modern Warfare 2
  12. Metal Gear Solid: Master Collection Vol. 1
  13. NBA 2K24*
  14. Starfield
  15. Elden Ring
  16. The Crew Motorfest
  17. Forza Motorsport
  18. Star Wars Jedi: Survivor
  19. Minecraft
  20. Lords of the Fallen

Top-Selling Games of 2023 So Far, U.S., All Platforms (Physical & Digital Dollar Sales):

  1. Hogwarts Legacy
  2. The Legend of Zelda: Tears of the Kingdom*
  3. Madden NFL 24
  4. Marvel’s Spider-Man 2
  5. Diablo IV
  6. Call of Duty: Modern Warfare 2
  7. Star Wars Jedi: Survivor
  8. Mortal Kombat 1
  9. Starfield
  10. Resident Evil 4 Remake
  11. MLB: The Show 23^
  12. EA Sports FC 24
  13. Dead Island 2
  14. Final Fantasy XVI
  15. Street Fighter 6
  16. FIFA 23
  17. Elden Ring
  18. Armored Core VI: Fires of Rubicon
  19. Remnant II
  20. Dead Space Remake

Video Game Hardware took the biggest hit of all major segments in October, moving down 23% to $327 million. I don’t see this as a major story, just a move from one month to the next. So many folks picked up new consoles to play Call of Duty in October 2022, with comparable system sales shifting into November this year.

In stark comparison to the monthly figure, Hardware has grown the most through the first ten months of the year, up 6% to $4.03 billion.

The month’s best-selling console again went to PlayStation 5, as measured by both units sold and revenue generated. It’s continuing to track as 2023’s top device by both metrics.

Intriguingly, even during a month in which a new Mario launched, Xbox Series X|S earned 2nd place on dollar sales, while Nintendo Switch was the runner up by units. I’d imagine that’s partially because of a higher selling price for Xbox, and Switch sales are mostly double dips, Mario red OLED versions or purchases for kids as its audience is firmly saturated.

Similar to the movement of their overall category, all of the three big console families saw double-digit spending declines in October.

In addition to the monthly figures, Circana also provided a quick update on where lifetime figures are for the current generation consoles. Which have now been on market for nearly three years! PlayStation 5 is currently 9% above the PlayStation 4, while the Xbox Series X|S family is tracking behind Xbox One by 11%. Makes sense, given the dichotomy between each company’s approach.

Within our final category of Video Game Accessories, spending last month lowered 2% to $147 million. The most modest of declines compared to its counterparts.

Through October, buyers have purchased $1.75 billion worth of Accessories, or 1% higher than the same time frame in 2022.

October’s top earning peripheral was Sony’s PlayStation 5 DualSense in midnight black. I was expecting that the Marvel’s Spider Man 2 Limited Edition controller might win again, as it did in September, though this result is probably more about limited supply than consumer sentiment.

I’ll confirm with Circana on the current annual best seller, which I believe is still the premium tier PlayStation 5 DualSense Edge based on just how much revenue it generates per sale alone.

Now, what about the Meta Quest 3? Didn’t it launch in mid-October?

It did. However, it wouldn’t be included in this particular industry report. Circana confirmed that Meta Quest headset spending isn’t considered gaming for their tracking purposes. Rather, it’s a “a multi-function device.” Which means that Circana’s Technology group reports on Meta Quest.

Compare that to something more streamlined for gaming like PlayStation VR 2, which is included. Even if it remains a somewhat small portion of the pie.

This treatment truly affects the Accessories numbers because Meta Quest has proven to have the most widespread appeal of any augmented or virtual reality device across the consumer space.

Before I recap and shift to predictions, here’s an added bonus: Circana’s new engagement rankings by platform! As part of its public report, the company is now sharing the most played titles across PlayStation, Xbox and Valve Corporation’s Steam digital marketplace for PC titles. Here’s a look at those, in order of Monthly Active Users (MAUs).

During October, Call of Duty: Modern Warfare 2, Fortnite and Marvel’s Spider-Man 2 were the most-played on PlayStation. When it came to Xbox, it’s the same top 2 games then Grand Theft Auto V reached third. Counter-Strike 2, Baldur’s Gate 3 and Cyberpunk 2077 were the most played on Steam. Other standouts included Roblox starting in 4th on PlayStation, Forza Motorsport zooming to 7th on Xbox and The Finals beta landing it in 4th on Steam.

While October’s total spend declined, there’s a clear reason for it and it won’t really impact 2023’s overall result other than shifting spending on Call of Duty to November. Separate of that, which is a purely hypothetical scenario of course, I’d bet October spending would have grown against last year, especially within Content.

On social media, Piscatella mentioned Hardware in particular didn’t have a surprising result, although he believe it was below that which the platform holders expected. He anticipates more discounting and promotion in the coming months. Plus, he’s becoming more cautious on his annual forecast of 3% spending growth in 2023.

Speaking of looking ahead, I’m looking at spending gains in November driven by what I expect to be the biggest seller in Call of Duty: Modern Warfare 3.

Even with lackluster reviews, it’s still the single most popular gaming brand in the country. It will catapult up the annual chart to become 2023’s best seller, maybe even in November’s report. I expect yet another year where two Call of Duty titles end up in the Top 10.

Now that October is behind us, the release slate is slowing down considerably. There’s a couple niche Nintendo titles in WarioWare: Move it! and Super Mario RPG remake, both of which will end up charting, the latter having more upside into possibly the Top 7. Otherwise, I think Sega’s Like a Dragon Gaiden: The Man Who Erased His Name can surprise, reaching a Top 15 start. There’s also Robocop: Rogue City which garnered more critical appeal than anyone ever thought it would. Why not, let’s say it gets a Top 20 start!

It’s a key time for Hardware approaching the November pre-holiday and the Black Friday period here in the States. I expect a comparable dynamic as October where PlayStation 5 will lead on revenue and units, with Xbox in second by dollars and Switch by units. Especially given the new PlayStation 5 model is now on sale, just in time for shopping sprees to begin.

This is where I recommend hopping over to Piscatella’s Twitter thread for further details and a complete rundown of those spankin’ new engagement lists.

I remain eternally thankful you are checking out the site! Stay well as the holiday season approaches.

Note: Comparisons are year-over-year unless otherwise noted.

*Digital Sales Not Included

^Xbox & Nintendo Digital Sales Not Included

Sources: Circana, Nintendo, PlayStation Blog, Sony Interactive Entertainment, Ubisoft Entertainment.

-Dom

PlayStation Hits Its Best Second Quarter Sales Ever as PS5 & Third Party Games Lift Sony’s FY 2023 Q2 Report

No rest for the writer!

Today continues an especially busy stretch of this latest earnings season, as Sony Corp just reported its fiscal 2023 second quarter results today out of Japan.

During this three months ending September, both the firm overall and the PlayStation division experienced revenue growth. And while profitability declined at the company level, the amount earned by Sony’s gaming business moved up double digits.

In fact, PlayStation just generated its best ever Q2 revenue in history.

That marks multiple record-breaking quarters in a row for Sony’s Game & Network Services (G&NS) segment, since Q1 hit its own all-time high as I covered a few months back. This past second quarter saw sales zip past $6 billion for the first time, jumping up more than 30% since last year.

Plus, unlike back in June, PlayStation has bounced back to profit growth this time. I’d argue this is even more substantial than record revenue because it accounts for expenses and really gets to the core of its ongoing health amidst a most turbulent of industries.

Underlying momentum was a higher PlayStation 5 contribution alongside better third party and add-on content performance. On the profit side, signs point to the Bungie acquisition costs being fully recognized, since there’s no longer a mention of the deal. Caveat being, similar to Nintendo, we can’t forget about the yen’s weakness on results for these kinds of Japanese companies that have a ton of overseas sales.

One major component is how PlayStation 5 shipped 4.9 million units between July and September, notably more than this time last year and the corresponding quarter for PlayStation 4. This figure was within management’s forecast, pushing lifetime PlayStation 5 sales to 46.6 million and closing the gap with its predecessor when launch-aligned, as I’ll dig into later.

As for the group’s forecast, executives increased guidance for annual gaming revenue across fiscal 2023 while maintaining guidance for operating income and PlayStation 5 hardware shipments at 25 million, which would be the single best year ever for the brand’s console output.

“We recognize selling more than 25 million PlayStation 5 units this fiscal year remains a challenging goal,” said Chief Financial Officer (CFO) Hiroki Totoki when talking to the media. “It will depend on how sales do in the year-end holiday season. We won’t pursue expanding the PlayStation 5 installment base alone, but will keep profitability in mind.”

Scroll down for a swing through the numbers then a set of my own predictions alongside Sony’s future forecasts.

Total revenue for Sony as a whole rose 3% to $19.6 billion, with the biggest growth contribution from G&NS, Sony Pictures and Music, offset by declines in other areas. However, operating profit at the group level declined 24% to $1.82 billion. This was led by quarterly declines for Financial Services, Imaging & Sensing Solutions and Entertainment, Technology & Services segments.

Focusing strictly on PlayStation during the three months ending September, revenue jumped up 32% to $6.6 billion. That’s an entire third of Sony’s overall business. It’s what I call a massive all-time number, considering last year’s $5 billion or so was also a Q2 record at the time.

A crucial note both in the broader context and at the PlayStation level is the specific impact of currency movement. Out of the $1.6 billion growth, upwards of $410 million is strictly because of foreign exchange rate changes. This helps understand how much of the trajectory is organic, compared to an economic market force like yen weakness.

Reversing its fortune compared to a decline in Q1, operating profit for G&NS moved up an impressive 16% to $340 million. That’s 19% of Sony’s group total. Affecting the plus side were both third party content sales and currency movement, plus there’s no longer any mention of certain acquisition costs that were dragging down profitability. I believe the $3.6 billion purchase of Bungie has been fully recognized now and will no longer affect the bottom line. On the downside, management cited how hardware has produced increased losses, I’d imagine due to higher manufacturing costs.

Checking out product category splits, which are shown in the last graph above, Hardware sales grew a whopping 60% since last year and contributed 30% of PlayStation’s total. The next largest segment at 23% of the pie was Add-On Content, moving up 18% in dollar value. Digital Software produced 39% growth, settling at 21% of the total. In fact, the only product type to decline was Physical Software, down a modest 4%.

Annual PlayStation revenue is tracking towards $28 billion. As you can see in the gallery above, on the revenue graph, this is well above the highest it’s ever been, over a billion more than last quarter. Essentially, if this keeps up, Sony’s gaming unit will have its best year of sales ever. On the other hand, annualized operating profit is at $1.75 billion, which compares more to the late days of the PlayStation 4 life cycle. Still great in a historical context, just not as strong as the past three years or so.

As of this week, the “big three” console manufactures have all reported their latest results. The sole remaining biggest player is Tencent, which will be later this month. Right now for comparison purposes, Sony’s $28 billion is tops for the industry. Even if backing out currency impact, it’s well in the lead. Tencent generated $25 billion as of last quarter, and Microsoft’s Xbox segment saw almost $16 billion (though that’s before accounting for anything from Activision Blizzard). Nintendo’s at $13 billion, albeit with more than twice as much annualized operating profit than PlayStation: $4.2 billion compared to $1.75 billion, respectively.

Heads up: enhanced launch-aligned PlayStation console sales chart is live!

This fancy visual aid gives more context to PlayStation 5’s improving shipment numbers. The console’s 4.9 million units sold-in last quarter is an increase of 48% compared to the 3.3 million in Q2 last year. Plus, it’s 26% higher than the PlayStation 4’s 3.9 million in the corresponding second quarter of fiscal 2016.

It’s the fourth quarter since PlayStation 5’s release in November 2020 that it moved more than 4 million units in a quarter, and one of those was that launch period.

Which means that PlayStation 5, at 46.6 million lifetime, has reversed course and narrowed the gap against its predecessor this quarter. It’s presently only a million units away from reaching PlayStation 4, boosting its trajectory since the supply challenges of yesteryear.

This latest lifetime figure means it’s also passed another gaming device on the all-time best-sellers list. That would be Nintendo’s 1980 handheld the Game & Watch, of course, which ended its tenure at 43.4 million. Next up will be Nintendo’s classic Super NES, which sold 49.1 million globally.

One statistic that Sony didn’t update was console sell-thru to consumers. Probably because it usually waits until a big milestone in order to do so. Earlier this year, the PlayStation 5 reached 40 million sold-thru as of July 16th. I’d bet it’s a bit higher now, maybe in the 45 million range, especially ahead of a system-seller like Marvel’s Spider-Man 2. I don’t see a reason demand would have fallen off.

Digging more into the supplemental stats present in PlayStation’s presentation, full game software unit sales stood at 67.6 million in Q2, up from 62.5 million last year. However, due to a lighter calendar, the proportion of first-party published games was lower, making up 7% of that total as opposed to 11% a year back.

Digital versions accounted for 67% of PlayStation game sales, up from 63% in September 2022. This means that 2 out of every 3 premium games purchased for Sony’s platforms were downloadable.

As for player engagement, Monthly Active Users (MAUs) across all of PlayStation Network totaled 107 million as of September month-end. While this is down a million from the June quarter, it’s up 5 million since last year’s Q2. Management also said that total hours played moved up 4% in the latest three months.

Here is where I’ll continue to lament the loss of PlayStation Plus membership numbers, which Sony stopped reporting earlier this year. It will forever, at least for the foreseeable future, remain cemented at 47.4 million as of March 2023.

It’s been a historic run lately for Sony’s top-line gaming numbers, pumping out multiple quarter’s worth of record revenue and generating more than $6 billion in second quarter sales for the first time. PlayStation is the premier industry player by revenue right now, even if backing out the impact from the yen’s depreciation.

Profitability has certainly been more questionable, partially because of temporary factors like studio investments, acquisition expenses and hardware manufacturing costs. Still, it achieved a double-digit income boost in Q2 on hardware units ramp up and software support from external partners like Electronic Arts and Take-Two Interactive with their respective sports titles, plus something like Diablo IV from Blizzard Entertainment and the Warner Brothers Mortal Kombat 1.

Which is why it’s even more painful to hear about layoffs at various PlayStation studios, including Media Molecule, Visual Arts and Bungie. There continues to be a disconnect between executives and everyone else. It’s not just at Sony, this is just one of the more glaring examples especially as its profitability gets back on track.

Impossible as it is to follow that up, I’ll take a look now at the company’s forecast and make some quick predictions.

The firm revised its fiscal year 2024 PlayStation revenue upwards by 5%. Management now thinks gaming sales will surpass $30 billion when the 12 months end in March 2024, in what would be an astonishing finish and record-breaking result. It then reiterated operating profit guidance of $1.87 billion.

In order to hit the 25 million PlayStation 5 hardware unit target, it still needs to ship almost 17 million units across the next two quarters. 16.8 million to be exact. Even with new PlayStation 5 slim models and the PlayStation Portal, this remains a staggering target that will require an absurd holiday number then a miraculous January to March. For context, the largest holiday season ever for PlayStation 4 was 9.7 million in fiscal 2016, and its largest March quarter was 3.1 million right after launch.

Yea, I’m still not a believer. In that overly ambitious forecast or the over-priced peripheral that is the PlayStation Portal. I’ll keep my same prediction as back in August: 24 million to 24.5 million, leaning more towards the lower end.

With respect to software, note that Marvel’s Spider-Man 2 launched after the three months covered here. Still, Sony shared a sales update for Insomniac Games’ latest open world adventure, selling-thru 5 million copies to consumers after 11 days. It had previously started with the best first 24 hours in PlayStation history, at 2.5 million copies. It’s since fallen behind God of War: Ragnarök at 5.1 million in 3 days, nearly a year ago to the day. The Last of Us: Part 2 moved 4 million copies during its opening 3 days back in June 2020.

All in all, it’s a fantastic launch for Peter Parker and Miles Morales considering the size of the PlayStation 5 install base, clearly bolstering the company’s expectations for the back half of this year.

The final bit of relevant news from Sony’s earnings was a comment around its live service strategy, moving into next fiscal year and beyond. As reported by Video Games Chronicle, CFO Hiroki Totoki mentioned that out of its previously-planned 12 live service titles originally scheduled for launch by end of Fiscal 2025, only half of them are on target. Considering how much time and money Sony is putting into this effort, moving them out is a big deal for its financial future and resource allocation. Personally, I remain skeptical that all of them well actually hit market at any point.

Whew. Well, that’s a wild week of coverage coming to a close. I hope you enjoyed this latest recap. Thanks much for hanging around during this season. I’ll have more coverage here and on social media as another eventful year approaches its inevitable end. Take care!

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥144.4.

Sources: Company Investor Relations Websites, Yahoo Finance, Video Games Chronicle.

-Dom

Nintendo Achieves Best 1st Half Sales of Switch Era & Raises Financial & Software Forecasts in 2024 Q2 Report

It’s a busy week here at the site and on socials, partly because the earnings calendar is packed. So, there’s no time to waste, I’ll get right into the topic at hand.

Nintendo reported its second quarter of its fiscal 2024 yesterday, which showcased a fantastic first six months. With sales rising more than 20%, this time frame ended up being the single biggest first half of a fiscal year for revenue since the Switch launched back in 2017.

With a couple of caveats. As always.

First, the results were mostly driven by the record first quarter that I wrote about in August. When focusing strictly on the April to June period, revenue and operating profit declined 4% and 20%, respectively due to a relatively light launch schedule and lower quarterly Switch hardware output than a year ago.

Beyond these dynamics, Japan is currently seeing its worst local currency depreciation in decades. Which is always worth mentioning in this context, and Nintendo specifically cites the yen movement in its report, because it has a notable effect on Japanese companies that operate globally.

Echoing this, Switch hardware unit shipments totaled 2.93 million in the quarter. That’s off 10% from the 3.25 million this time last year. Still, it pushed Switch lifetime shipments to 132.46 million, making it only the third gaming hardware ever to pass the 130 million mark.

In terms of new games, Pikmin 4 was Switch’s big title during the quarter, and has shipped 2.61 million copies since June. This amount means it’s already the highest-selling game in the franchise to date. Add it to the list of titles impacted by the Switch effect, which often boosts new titles in existing series to all-time sales records.

The Legend of Zelda: Tears of the Kingdom also contributed to software and continued its monumental run, now approaching the 20 million unit milestone in just its second quarter. The latest mainline Zelda is a smash hit, already at almost two-thirds of 2017’s classic Breath of the Wild lifetime sales!

In what I’d argue is the most important part of the report, and something I predicted would happen during my Q1 article, Nintendo raised most of its guidance for the full financial year. Management now expects higher revenue, operating profit, software unit shipments and will pay a higher dividend to shareholders. The only thing it didn’t raise was Switch hardware shipments, which it “only” reiterated at the current level of expectation.

“For hardware, by continuing to convey the appeal of Nintendo Switch, we try not only to put one system in every home, but several in every home, or even one for every person,” the company said related to its forecast. “Another objective is to continually release new offerings so more consumers
keep playing Nintendo Switch even longer and we can maximize hardware sales.”

Here’s quick bonus for something that happened after this financial period: Nintendo announced today that Super Mario Bros. Wonder sold-thru 4.3 million units to consumers during two weeks on sale. This makes it the fastest-selling Super Mario title, at least since the firm began tracking this stat in 2004. No wonder execs are more optimistic after yet another historic Switch launch.

Just like Drill Mario would, I’m now going to dig deeper into the numbers.

I’ll first address its quarterly earnings then expand to the 1st half and annualized figures for greater context on how Nintendo’s business is faring over time.

For the second quarter alone, revenue came in at $2.38 billion or 4% lower than a year back. Operating profit dropped 20% to $670 million. Which checks out, due to the big release of this period being Pikmin 4 plus Switch has almost achieved hardware saturation in its likely last year.

Taking the full six months into account, Nintendo achieved $5.65 billion in sales and $1.99 billion in operating income, increases of 21% and 27% respectively. That sales number is above even Switch’s best year in 2020, and operating profit is not far off from that year’s high either.

While this is certainly bumped up by out-performance of Tears of the Kingdom and the Super Mario Bros. Movie, slightly higher hardware units and early upside from Pikmin 4, there’s also the element of yen depreciation. While currency movement is usually more temporary, Japan’s currency weakness has been ongoing for many quarters now.

Taking a look into product categories, Nintendo’s hardware business accounted for around 41% of sales during both the first quarter and six months. That’s relatively constant since last year, when it was at 40%. Software accounted for the remaining 59% this time around, where it was 60% last year. A system-seller like Zelda plus certain bundles continue to prop up console sales this late in the cycle.

From a regional perspective, sales shifted out of Japan and into other territories. Both the Americas and Europe stayed the same since last year, contributing 44% and 23%, respectively. Japan declined from 24% to 21%, while what Nintendo classifies as Other jumped up from 9% to 12%.

Both digital and Intellectual Property (IP) related sales experienced the most growth during Nintendo’s first fiscal half, even if these areas still don’t represent a major portion of sales. Digital revenue output moved up 16%, and accounted for exactly half of the company’s Q2 dollar sales, virtually the same as the 51% a year ago. The mobile and IP-related category more than doubled, jumping 133%. Growth came more so from the IP side than mobile, as The Super Mario Bros. Movie stands at over $1.36 billion in box office earnings.

Combining the last four quarters, the company’s trailing 12-month revenue is currently at $13 billion. While down slightly since last quarter’s $13.12 billion, it’s up 6% year-on-year. Annualized operating profit is tracking towards $4.2 billion, down only slightly compared to both Q1 and last year’s second quarter.

If the revenue number holds, and the firm hits its latest target, Nintendo could achieve the highest annual sales since Wii’s massive popularity in 2008, even with the Switch hanging on during its twilight years.

Pulling a similar passage from my last Microsoft write-up, I’d like to compare industry peers to get a sense of where all of them stand right now. Sony, which reports results tomorrow, had PlayStation revenue upwards of $27.8 billion at last count. Tencent came in next at $25 billion, then Microsoft generated $15.78 billion before the Activision Blizzard deal closed. This is where Nintendo slots, at $13 billion. One thing to note is that Nintendo is more profitable than Sony, which is the only firm out of these four that reports profit numbers for gaming, and I’d imagine it has better margins than Microsoft’s Xbox business with its big investments and product expenses lately.

I mentioned a bit about Nintendo’s hardware results up front, I’ll now get into a more detailed breakdown of this product category.

The second quarter saw those 2.93 million Switch shipped to market, compared to 3.25 million a year ago. This tracks, notably after just how many units moved during the prior quarter, including a desirable special edition for Zelda.

Now, during the first six months of fiscal 2024, Switch sales moved up 2% to 6.84 million. While not quite at the highs of the Switch’s glory days in 2020 to 2022, it is above earlier shipments figures before 2019 during the corresponding time frame.

This shows the utter resilience of Nintendo’s hardware appeal, and making games that translate well from console to handheld. Plus, it highlights how the move to an OLED model replacing the base model drives people to picking up multiple devices for themselves or household members.

Out of those 6.84 million for the first half, 4.69 million were OLED versions. That makes up 69% of the total, and it’s 32% higher than last year’s figure. In fact, it’s the only model to grow over this time frame, considering the base model dropped 44% to 1.25 million units and Switch Lite moved down a more modest 2% to 900K.

This continues to life the lifetime Switch hardware figure, now standing at that 132.46 million. Which is still wild to write, mainly because of how it’s outpaced all expectations. Even mine and Nintendo’s itself. Thing is, while it’s secured a Top 3 spot on the all-time best-selling console list, I don’t see it moving up any further assuming Super Switch is out within the next 12 months. There’s still a 21.56 million gap between Switch and Nintendo DS at 154.02 million.

Then again, the Switch has exceeded all expectations thus far. It might surprise me.

One additional item that I found disappointing from Nintendo’s report is there wasn’t any further detail on console sell-thru to consumers, which it has recently added to its explanatory material. This is likely because it’s trending downward. Still, I’d rather the more data, the better. Maybe next time.

I’ll now take a similar look at the current software dynamic for Nintendo, the segment that makes up the majority of its business right now.

Overall Switch software unit sales in the quarter totaled 44.87 million, down 14% from 54 million. On the flip side, 1st half game sales rose 2% from 95.41 million to 97.08 million. It helps to have one of the highest-rated titles of all time launched in this period in Tears of the Kingdom.

These results drove lifetime software sales for Switch to pass yet another major milestone, this time surpassing 1.1 billion copies sold. It’s now upwards of 1.13 billion, an astonishing result. For perspective, the DS and Wii never reached a billion, even with the former selling many more hardware units. The sheer number of games that Switch owners buy, especially first party, is higher than any Nintendo device in history.

Speaking of big sellers, the number of games that have shipped over a million units during the current fiscal year jumped up a sizeable amount. There were only two back in Q1, just Tears of the Kingdom and the ever-present Mario Kart 8 Deluxe. The Q2 number was 16. Out of these, 12 were published by Nintendo while 4 were produced by third parties.

Chief among them being Pikmin 4, hitting that all-time high for a Pikmin franchise game of 2.61 million units in a single quarter. The previous record holder was Pikmin 3 Deluxe, another Switch title that has moved 2.4 million copies since October 2020.

I will point out that while the latest title has the best lifetime unit sales already, it currently has a lower attach rate than its predecessor partially because of just how many Switch have flooded the market. Pikmin 3 sold 1.28 million, or 9% of Wii U console sales, while Pikmin 4 stands at a 2% attach rate. For the time being.

Separately, it’s hard to overstate the pure magnitude of Tears of the Kingdom. The title sold another million units in the quarter ending September, bringing lifetime sales to 19.5 million. It’s not often that a game approaches 20 million units in a couple quarters. Thus, the title held its position as the 9th best-selling Switch title and will easily surpass Super Mario Party‘s 19.66 million next quarter.

I can’t write about Nintendo earnings and not mention Mario Kart 8 Deluxe, the game that never stops selling. It sold more copies than the brand new Zelda title last quarter, moving over a million and a half in Q2 alone. This game is almost a decade old, people! After this latest boost, the Switch version has officially passed 57 million sold to date.

Elsewhere in terms of new milestones, 2022’s Nintendo Switch Sports scored a new mark, passing 10 million to settle at 10.77 million.

While Nintendo usually reports on shipped numbers, it did share some insight into sell-thru to consumers. In addition to the aforementioned record launch for Super Mario Bros. Wonder, Pikmin 4 has sold-thru 2.5 million units globally as of last week, the largest start in series history.

As for engagement and player stats, Nintendo hit us with an update on Switch Online memberships and (its made-up stat of) Annual Playing Users, both of which are growing at this time as the user base expands. Switch Online subscribers now stand at 38 million, up from 36 million as of September 2022. Annual Playing Users, which is the number of people who have played a single game on Switch in the last 12 months, moved up to 117 million. It was 116 million in Q1, and 108 million last year.

Even considering the latest quarter trending down a bit, Nintendo bucked the trend of an aging console during the first half of fiscal 2024, turning it into a historic one for top-line sales compared to all others since the Switch first launched. It certainly helped to have a blockbuster movie to supplement traditional revenue streams, capitalizing on the quality of its big brand identities.

For a console manufacturer, this highlights the need to diversify. Especially when deep into a hardware cycle at a time when investment is ramping up for the next big device and its corresponding launch lineup.

Nintendo has mixed success in the past leveraging IP in various types of media. The last few months show it’s possible, between theme parks and film, proving there’s major upside as long as they instill that magic that has defined the company for generations and appeal to a multi-generational audience. Cross-media is a core factor behind what’s becoming a banner year for the publisher. And now with the announcement of a live-action Zelda flick in development, it will shape the company’s future income as well.

Here’s where I’ll look at that updated forecast, moving into the pivotal back half of the 2024 fiscal period.

Executives increased annual guidance for overall revenue by 9% to $11.2 billion. Operating profit guidance rose 11%, now expecting $3.55 billion. Additionally, it now expects to sell 185 million units of software during the full year, 3% higher than its initial forecast.

I honestly think the financial targets are still too conservative, based on the annualized numbers I referenced earlier. I think management will slightly increase revenue and profit estimates in its next report.

The firm also confirmed annual Switch hardware unit sales guidance at 15 million. That means between the holiday quarter and the first calendar year quarter, it needs to move 8.16 million more units. For context, last year’s December quarter alone saw sales of 8.23 million. While the Switch is a year older, I believe Super Mario Bros. Wonder among other title launches, a new Red Mario OLED model and a Super Smash Bros. Ultimate bundle can produce enough sales to beat the current estimate.

Even though I’m bullish, I’m slightly less upbeat than I was three months ago. I will slightly reduce my target, now expecting between 16 million to 16.5 million in the year ending March 2024.

2023 has been a huge year for Nintendo’s first-party lineup, across mainline Zelda and Mario titles alone, and I believe it has a decent supplemental slate for the holidays that can lead to financial targets being beat. Detective Pikachu Returns, WarioWare: Move It!, a remake of Super Mario RPG plus more content for Mario Kart and Pokémon titles will act as a second helping to the ongoing main courses of Zelda and Mario.

As for what’s ahead in 2024 and beyond, notably for the console transition, I’ll address those in a future article. For now, that does it for Nintendo’s latest quarter. Stay tuned this week for Sony’s results, and hop over to the earnings calendar to track everything this season.

Thanks for reading! Take care, all.

Note: Comparisons are year-over-year unless otherwise noted. Exchange rate is based on reported average conversion: US $1 to ¥140.96.

Sources: Bloomberg, Company Investor Relations Websites.

-Dom

Starfield Rockets Xbox to Best September Quarter Sales Ever in Microsoft’s Fiscal 2024 Q1 Results

Now that I’ve posted my last earnings calendar of 2023, it’s time to look at some actual results!

First up for the big three of the games industry was Microsoft, which posted its first quarter of fiscal 2024 numbers last night.

During this time frame, the Xbox business unit had a record first quarter sales performance. Quarterly revenue on gaming moved up nearly double-digits, generating almost $4 billion.

The clear driver was Starfield in September, a launch which fit the general theme of the Washington-based company’s strategy. Bethesda Game Studios’ space RPG pulled in Game Pass subscribers more than console buyers, a clear signal that this generation is unlike any other for the platform holder.

That’s because, while content and software sales moved up for Xbox, hardware spend actually declined in this same quarter of the year’s flagship game hit market. Starfield and all first-party titles for Xbox land on its subscription service day one, plus the publisher has been offering early access to its biggest titles. For a small fee, of course.

This translated to a boost in hours played and dollars spent by gamers during July to September period, even if they weren’t as interested in scooping up Xboxes.

“In our consumer business, PC market unit volumes are returning to pre-pandemic levels. Advertising spend landed roughly in line with our expectations,” said Chief Financial Officer (CFO) Amy Hood. “And in Gaming, strong engagement helped by the Starfield launch benefited Xbox Content and Services.”

The other headline news recently for Microsoft was the closure of its $69 billion deal for Activision Blizzard, as of mid-October. This subsidiary is now included in financial forecasts and will account for the bulk of the combined entity’s gaming growth during the upcoming holiday quarter.

Scroll down for a close examination of Xbox’s all-time Q1, industry peer comparisons, a discussion on Activision Blizzard’s impact plus a suite of predictions from both management and yours truly.

Based on the above slides and its filings, Microsoft reported gaming revenue of $3.92 billion in the latest quarter. That’s an all-time Q1 best, 9% above the former record holder last year of $3.61 billion.

This growth came in slight above the company’s estimate of “low to mid single digits,” attributed to out-performance of first party and a higher contribution from Game Pass revenue. This indicates that, at least on the content sales side, Starfield had a better debut than management thought it would and brought in more interest than projected.

Moving to the chart in the gallery above, despite this record quarter, Xbox’s $15.78 billion in trailing 12-month revenue is currently 3% below where it was at the beginning of fiscal 2023.

This modest downward trajectory for the annualized figure is certainly temporary, as you can see in the final column there which incorporates the second quarter estimate due to an Activision Blizzard boost, which I’ll cover in a later section.

Now that we know Xbox’s present annual revenue figure of $15.78 billion, we can map where it stacks up across big players in the industry. Sony’s in the lead with the PlayStation figure being over $27.8 billion, amplified by a currency impact and maximum console availability. Tencent accumulated $25 billion over its latest year, while Nintendo generated $13.46 billion.

Here’s where I remind everyone, especially the fanboys, of certain caveats on these comparisons. First, it’s early in the season and there will be updates throughout the coming weeks. Then, the yen has bumped up sales especially for Sony which is also much less profitable then at least Nintendo (Microsoft and Tencent do not report profit numbers for gaming). Plus, Activision Blizzard will augment Microsoft to at least $18 billion and more in the future, so everything is relative.

As I alluded, sales only tell part of the story. While we don’t know how much Xbox made when backing out expenses, we can infer some things from its broader category and the margin mix. Gaming is a part of Microsoft’s More Personal Computing (MPC) segment, which saw Q1 operating profit go up a whopping 23% to $5.17 billion. While expenses declined 1%, the firm cited how this was more driven by a better margin in Devices that was offset by “investments in Gaming” probably related to Starfield’s marketing push. Still, since it didn’t sell as many consoles, which are typically lower margin than software, I’d wager Xbox’s profit only reduced marginally.

I’ll now shift towards digging into results for the two major product categories: Xbox Content & Services and Xbox Hardware.

Essentially, the former had a great quarter while the latter was lackluster.

Xbox Content & Services spending moved up a healthy 13%, amassing $3.18 billion over the three months ending September. By my math, that’s the highest single first quarter for this segment in history. It comprised 81% of Microsoft’s total gaming revenue in Q1, versus 78% this time last year.

It also follows that, over the last year, Content & Services hit $12.55 billion, which is the second highest total ever behind only fiscal 2022 Q3 at $12.7 billion.

More than ever, the fact that content was over 80% of gaming sales when a traditional “system-seller” type game hit market signals the ever-growing movement away from console sales and towards ecosystem. Management wants people to subscribe to their service, to generate ongoing revenue, to bolster that bottom line, rather than one-time purchases of low margin hardware.

And that’s exactly what’s happening more and more this generation as the mix remains towards software and subscriptions.

When talking about the gaming division on the earnings call, Chief Executive Officer (CEO) Satya Nadella shared that Starfield has now attracted over 11 million players to date, up from 10 million as of September 20th.

Showing a more multi-platform skew, management mentioned that almost half of the hours spent on the title have been on PC. Plus, they said it led to a single day record for new Game Pass subscriber sign-ups on its launch date. Unfortunately, they didn’t give any specific figures behind this particular claim, or what the prior best day ever might have been.

I’ll now sound like a broken record, and not the good kind, when I write that yet again management did not share updated Game Pass subscriber numbers. Which is increasingly odd, notably during a monumental quarter with Starfield supposedly boosting the service. Microsoft would have us believe it’s still at 25 million. I’d imagine we might finally hear more after Activision Blizzard titles are integrated and it hits another big milestone because of that.

Flipping in the other direction in Q1 was Xbox Hardware, which saw 7% lower sales than 12 months back. That’s 5% worse than expected, based on backing into management’s prior guidance.

This happened right after a Q4 where it declined 13%, showing that not only were console sales down even leading into the year’s biggest exclusive software launch, they were even worse than Microsoft expected.

Combining the last four quarters, Xbox Hardware currently accounts for $3.23 billion. That’s down 15% year-on-year from the high of $3.8 billion earlier in this Xbox Series X|S generation.

Which, I believe, won’t necessarily phase management. Because console sales are on the back-burner more than they have ever been in the 20-year plus history of the brand.

This time period encapsulates, even amplifies, Microsoft’s strategy. It doesn’t have system-sellers anymore; it has Game Pass sellers. It doesn’t rely on console sales any more; it relies on subscription offerings and catalog consistency. Whether or not this will be sustainable over a longer timeline is the million, scratch that, billion dollar question.

Without unit shipments being reported publicly, all we have are estimates that really end up being closer to guesses. Last quarter, I had Xbox Series X|S at between 24 million and 24.5 million lifetime, thus below Xbox One’s 24.7 million at that same stage. Xbox Series X|S was still above the Xbox 360, which was at 20.3 million launch-adjusted.

What about now and the comparison to prior generations and peers? My best guesstimate puts Xbox Series X|S lifetime at 25.5 million or so. Almost definitely no higher than the 26 million that many estimate Xbox One had by fiscal 2017 Q1. As for current generation comps, Sony’s PlayStation 5 is at nearly 42 million, likely approaching at least 45 million by the time it reports next week.

Competitors are consistently outpacing Xbox in key regions, even during the debut month of Starfield. Circana’s September report on U.S. sales had it in second place behind PlayStation 5, which was also last month’s best-selling console across Europe according to a Games Industry Biz article.

Echoing the success of gaming, Microsoft overall amassed $56.5 billion in revenue in Q1, ending 13% higher than the year prior. Operating profit jumped a whopping 25%, to nearly $27 billion.

Similarly, Microsoft Cloud sales bumped up 24% to $31.8 billion. Nadella and Hood both cited Artificial Intelligence (AI) businesses along with its enterprise operating system and productivity offerings as providing substantial upside.

The Xbox unit just had an all-time July to September period, as predicted in earlier articles, due to the highest profile software it has all year alongside the attraction of a subscription service that offers a lower-priced entry to play that. Plus, an experience like Starfield brings in more PC players than usual because of its modding potential and that Bethesda longevity.

Looking ahead, this is the first official forecast we’ve had from Microsoft on the impact from Activision Blizzard. The firm’s historical comparisons and financial forecasting are both going to be skewed due to the inclusion of this new subsidiary for the foreseeable future.

Its immediate effect will be massive. Across Q2, which is also the holiday quarter ending December, gaming sales are expected to see a growth percentage increases in the “mid to high 40s” i.e. around 45% to 49%.

Out of that, executives said the net impact from Activision Blizzard’s inclusion was 35 points, or 35%. Thus, organic growth for Xbox in Q2 would be around 10% to 14%.

What would that look like in dollar terms? Nearly $7 billion in revenue for the quarter ending December, with Activision Blizzard contributing nearly all of the growth. That’s over a billion and a half better than Xbox’s best quarter of all time, and it means 12-month sales would breach the $18 billion mark.

The company said Xbox Content and Services would grow in the “mid to high 50’s” or almost 60% growth. This would equate to another record of $5.3 billion in quarterly content sales alone.

50 points, or 50%, of that will be from the acquisition. Notably, there’s November’s Call of Duty: Modern Warfare 3, knock-on from Diablo IV and legacy titles entering Game Pass. Something like Forza Motorsport will bolster organic growth, as will major third party launches like sports titles from Electronic Arts and Ubisoft’s busy late calendar slate of Assassins Creed Mirage, Avatar: Frontiers of Pandora and The Crew Motorfest.

While Microsoft doesn’t provide official guidance on Xbox Hardware, it’s easy to back into it, and I arguer it leads to an even bigger story. Management is signalling growth for console sales well into the double-digits, upwards of 22%, to $1.7 billion. That would be the best growth rate in two years, and it’s the aspect of this forecast where I’m the most skeptical.

Now that I’ve covered the financial results, what caused them and where Microsoft is going into this quarter and beyond, that wraps up my first big rundown of the season. Thanks everyone for reading, and hopefully I’ll see you back very soon for more articles and analysis. Stay safe, all.

Note: Comparisons are year-over-year unless otherwise noted.

Sources: Bethesda, Circana, Company Investor Relations Websites, Games Industry.Biz.

-Dom